Gharad Bryan , Dean Karlan and Jonathan Zinman Referrals : peer screening and enforcement in a consumer credit field experiment

Empirical evidence on peer intermediation lags behind many years of lending practice and a large body of theory in which lenders use peers to mitigate adverse selection and moral hazard. Using a simple referral incentive mechanism under individual liability, we develop and implement a two-stage field experiment that permits separate identification of peer screening and enforcement effects. We allow for borrower heterogeneity in both ex-ante repayment type and ex-post susceptibility to social pressure. Our key contribution is how we deal with the interaction between these two sources of asymmetric information. Our method allows us to identify selection on the likelihood of repayment, selection on the susceptibility to social pressure, and loan enforcement. We estimate peer effects on loan repayment in our setting, and find no evidence of screening (albeit with an imprecisely estimated zero) and large effects on enforcement. We then discuss the potential utility and portability of the methodological innovation, for both science and for practice. JEL Codes: C93 D12 D14 D82 O12 O16 ∗Bryan: London School of Economics and Innovations for Poverty Action, [email protected]. Karlan: Yale University, M.I.T. Jameel Poverty Action Lab, Innovations for Poverty Action and NBER, [email protected]. Zinman: Dartmouth College, M.I.T. Jameel Poverty Action Lab, Innovations for Poverty Action and NBER, [email protected]. The authors would like to thank Manfred Kuhn and the employees of Opportunity Finance, Luke Crowley, Jon de Quidt and seminar participants at Yale, NEUDC, Warwick, Hebrew University, Stanford GSB, Wharton, The NBER summer institute and The Cambridge conference on consumer credit and bankruptcy. We would also like to thank The Bill and Melinda Gates Foundation for funding. This paper formed the third chapter of Gharad Bryan’s dissertation – he would like to thank The Kauffman Foundation for financial support. All errors are, of course, our own.