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Joint liability versus individual liability in credit contracts

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  • Madajewicz, Malgosia

Abstract

Abstract I offer an explanation for the coexistence of joint-liability and individual-liability microcredit contracts. I show that both contracts maximize welfare when credit is rationed due to limited liability, but for different borrowers. Borrowers monitor each other when liability is joint, while the lender monitors individual loans. Joint liability offers poorer borrowers larger loans with less monitoring effort than would have to be exerted by the lender. Individual liability offers the wealthier among credit-constrained borrowers larger loans even without monitoring. The theory explains why individual loans serve the wealthier among poor borrowers and are larger, and why businesses funded with individual loans grow more.

Suggested Citation

  • Madajewicz, Malgosia, 2011. "Joint liability versus individual liability in credit contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 107-123, February.
  • Handle: RePEc:eee:jeborg:v:77:y:2011:i:2:p:107-123
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:ecmode:v:72:y:2018:i:c:p:31-41 is not listed on IDEAS
    2. Francesco Reito & Salvatore Spagano, 2014. "A Comparison between Formal and Informal Mutual-credit Arrangements," The Developing Economies, Institute of Developing Economies, vol. 52(2), pages 179-201, June.
    3. Labie, Marc & Méon, Pierre-Guillaume & Mersland, Roy & Szafarz, Ariane, 2015. "Discrimination by microcredit officers: Theory and evidence on disability in Uganda," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 44-55.
    4. Attanasio, O.P. & Augsburg, B. & de Haas, R. & Fitzsimons, E. & Harmgart, H., 2013. "Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Rural Mongolia," Discussion Paper 2013-074, Tilburg University, Center for Economic Research.
    5. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2016. "Joint liability lending and credit risk: Evidence from the home equity market," Journal of Housing Economics, Elsevier, vol. 32(C), pages 47-66.
    6. Czura, Kristina, 2015. "Pay, peek, punish? Repayment, information acquisition and punishment in a microcredit lab-in-the-field experiment," Journal of Development Economics, Elsevier, vol. 117(C), pages 119-133.
    7. Maurizio Caserta & Francesco Reito, 2013. "Outreach and Mission Drift in Microfinance: An Interpretation of the New Trend," Economics Bulletin, AccessEcon, vol. 33(1), pages 167-178.
    8. repec:eee:jeborg:v:151:y:2018:i:c:p:307-325 is not listed on IDEAS
    9. Erica Field & Rohini Pande & John Papp & Natalia Rigol, 2013. "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India," American Economic Review, American Economic Association, vol. 103(6), pages 2196-2226, October.
    10. repec:bla:scotjp:v:64:y:2017:i:3:p:283-309 is not listed on IDEAS
    11. repec:pal:eurjdr:v:29:y:2017:i:2:d:10.1057_s41287-016-0014-y is not listed on IDEAS
    12. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, vol. 107(C), pages 65-83.

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