| Abstract: |
Joint liability loans are used in various settings, including business
partnerships, agricultural cooperatives, and real estate investment. Most
notably, they have been central to the microfinance model since the 1970s.
Despite early promises, recent evidence suggests that joint liability has not
consistently reduced loan defaults or operational costs. As a result,
microfinance institutions (MFIs) worldwide are increasingly shifting toward
individual liability contracts. A key limitation of traditional joint
liability loans lies in their symmetric contract structure, which often leads
to coordination failures and free-riding: while peers can enforce repayment,
they may jointly default or shirk monitoring responsibilities. We propose that
introducing asymmetry in joint liability contracts, by designating one group
member as a lead borrower with preferential interest rates, can enhance peer
monitoring and reduce moral hazard. We extend an existing theoretical model of
ex-ante moral hazard (investment behavior) to the scenario of hazard
(strategic default) and evaluate both frameworks through a lab-in-the-field
experiment with microfinance clients in urban Bolivia. Our experimental
results show that asymmetric contracts significantly increase peer monitoring
by 17-20% in both moral hazard scenarios. These findings suggest that
asymmetric group lending contracts offer a promising path to reviving joint
liability in microfinance. |