Information Asymmetry, Group Structure And Repayment: a Study from BRAC Sierra Leone

Abstract

By pulling together survey and experimental data, this research provides new empirical insight into the role of information asymmetry in the process of group structure, the role of risk homogeneity under group lending and their implications for repayment using a unique dataset from rural microfinance members of BRAC in Sierra Leone. Using a series of artificial field experiments (AFE) with microfinance members, games were implemented to determine information asymmetries and risk preferences. Evidence shows indirectly that when microfinance members have more social linkages in their group, which is correlated with the pay-out of the coordination game, that their repayment is better. Direct evidence suggest that when small microfinance groups are more homogeneous in risk, repayment of these microfinance members is also better. This also accounts for the homogeneity in small groups in terms of educational level. When members have the same educational level, repayment is better. These outcomes are consistent with several established theories.