Technology Replaces Culture in Microcredit Markets: the Case of Italian MAGs

We collect data from three Italian microcredit institutions, MAG2, MAG4 and MAG6, which operate in Milan, Turin and Reggio Emilia respectively, by targeting two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations). Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza-Webb and we verify that both repayment rate and welfare increase, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, is able to extract information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers do not know each other and social sanctions are weak.