Microfinance Contracts for Farmers in Western Kenya

Group liability is commonly cited as the feature of microcredit that helps solve information asymmetries through effective peer screening and monitoring. However, group liability may steer borrowers away from risky high-expected return investments, thus explaining why most microfinance-funded businesses remain in subsistence entrepreneurship.In this project I propose a randomized controlled trial among clients of a large microfinance organization working in agriculture in Kenya. The goal of the evaluation is to measure the effects of individual liability contracts (relative to group liability contracts) on borrowers’ investment decisions and repayment, and to determine whether these effects operate through the selection channel or by changing borrowers’ actions, or both.