Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets

How do borrowers respond to improvements in a lender’s ability to punish defaulters? We implemented a randomized field experiment in Malawi examining the impact of fingerprinting of borrowers, which improves the lender’s ability to withhold future loans from individuals who have previously defaulted while rewarding good borrowers with increased loan sizes. Study participants were smallholder farmers applying for input loans for growing a cash crop, paprika. Farmers were randomly allocated to either: 1) a control group, or 2) a treatment group that was fingerprinted as part of the loan application. Both treatment and control groups were given a presentation on the importance of credit history in ensuring future access to credit. For the subgroup of farmers with the highest ex ante default risk, fingerprinting led to substantially higher repayment rates. By contrast, fingerprinting had no impact on repayment for farmers with low ex ante default risk. Additional evidence indicates that, in the high-default-risk subgroup, fingerprinting resulted in higher repayment due to reductions in adverse selection (smaller loan sizes) and lower moral hazard (e.g., less diversion of fertilizer from the paprika crop).