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Key Factors of Joint-Liability Loan Contracts: An Empirical Analysis

  • Alexander S. Kritikos
  • Denitsa Vigenina

This paper provides an empirical analysis of joint-liability micro-lending contracts. Using our data set, we examine the efficacy of various incentives set by this contract such as joint-liability between groups of borrowers or group access to future and to larger loans. As proposed by theory, we find that joint liability induces a group formation of low risk borrowers. After the loan disbursement, the incentive system leads to peer monitoring, peer support and peer pressure between the borrowers, thus helping the lending institution to address the moral hazard and enforcement problem. This paper also demonstrates that the mechanism realizes repayment rates of nearly 100% if the loan officers fulfill their complementary duties in the screening and enforcement process. Finally, we make clear that dynamic incentives, in contrast to theory, have to be restricted if the two long-term problems of the joint-liability approach, i.e. its mismatching problem and the domino effect, are to be tackled notably. Copyright 2005 Blackwell Publishing Ltd..

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Article provided by Wiley Blackwell in its journal Kyklos.

Volume (Year): 58 (2005)
Issue (Month): 2 (04)
Pages: 213-238

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Handle: RePEc:bla:kyklos:v:58:y:2005:i:2:p:213-238
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  1. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  2. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
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