Peer monitoring, social ties and moral hazard in group lending programmes: evidence from Eritrea

In this paper, we provide an empirical analysis of the impact of monitoring and social ties within
group lending programs on moral hazard behavior of its participants, based on data from an
extensive questionnaire held in Eritrea among participants of 102 groups. We find support for the
fact that peer monitoring by and social ties of group leaders do help to reduce moral hazard
behavior of group members. In contrast, peer monitoring by and social ties of other group
members are not related to reducing the occurrence of moral hazard within groups.

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