Peer Effects and Loan Repayment: Evidence from the Krishna Default Crisis

I estimate loan repayment peer effects by analyzing a natural experiment during which 100% of borrowers temporarily defaulted on their microloans. Because the defaults occurred simultaneously, the timing of the shock induced variation in both individual- and peer-level repayment incentives. Using variation in the peer group's incentives to instrument for peer repayment, I find that if a borrower's peers all repay, she is 10-15pp more likely to repay. I estimate the benefit of peer effects to the lender using a dynamic discrete choice model and find that overall, the peer effects improve repayment rates and profits relative to a counterfactual.