Can Better Forms of Personal Identification Improve the Functioning of Credit Markets?

From a new working paper by Xavier Giné, Jessica Goldberg, and Dean Yang:

We report the results of a randomized field experiment that examines the credit market impacts of improvements in a lender’s ability to determine borrowers’ identities. Improved personal identification enhances the credibility of a lender’s dynamic repayment incentives by allowing it to withhold future loans from past defaulters and expand credit for good borrowers. The experimental context, rural Malawi, is characterized by an imperfect identification system. Consistent with a simple model of borrower heterogeneity and information asymmetries, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of the borrowers. The change in repayment rates is driven by reductions in adverse selection (smaller loan sizes) and lower moral hazard (for example, less diversion of loan-financed fertilizer from its intended use on the cash crop).

I had seen Xavi present this paper at Namur when I was on sabbatical there in 2009-2010. Back then, the paper had a different title (“Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets,”) which I am surprised they abandoned given the “identification strategy” play on words.