IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Adverse Selection and Moral Hazard in Joint Liability Loan Contracts: Evidence from an Artefactual Field Experiment

  • Giorgia Barboni

    (Institute of Economics and LEM, Scuola Superiore Sant'Anna, Pisa, Italy)

  • Alessandra Cassar

    ()

    (Department of Economics, University of San Francisco, CA, U.S.A.)

  • Arturo Rodriguez Trejo

    (Department of Economics, University of San Francisco, CA, U.S.A.)

  • Bruce Wydick

    (Department of Economics, University of San Francisco, CA, U.S.A.)

Registered author(s):

    We design an artefactual field experiment to study the relationship between joint-liability lending and adverse selection, moral hazard and risk preferences. While theories concerning joint-liability lending have highlighted its ability to mitigate adverse selection in credit transactions, our experimental results indicate that joint-liability lending may actually induce problems of adverse selection. The results of our experiment, carried on in partnership with a Bolivian microlender, show that borrowers exogenously endowed with a risky project are disproportionately likely to choose jointly-liability contracts over individually-liable contracts. This behavior does not appear to be motivated by risk-diversification, but rather by free-riding, as these subjects disproportionally switch from safe to risky projects when exogenously given a joint-liability contract instead of an individual contract. Thus the results of our experiment offer a possible explanation why joint liability loans have diminished in popularity in recent years among both borrowers and microfinance lenders.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.jem.org.tw/content/pdf/Vol.9No.2/04.pdf
    Download Restriction: no

    Article provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.

    Volume (Year): 9 (2013)
    Issue (Month): 2 (July)
    Pages: 153-184

    as
    in new window

    Handle: RePEc:jec:journl:v:9:y:2013:i:2:p:153-184
    Contact details of provider: Postal: 100 Wenhwa Road, Seatwen, Taichung
    Web page: http://www.jem.org.tw/

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Abigail Barr & Garance Genicot, 2008. "Risk Sharing, Commitment, and Information: An Experimental Analysis," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1151-1185, December.
    2. Alessandra Cassar & Bruce Wydick, 2010. "Does social capital matter? Evidence from a five-country group lending experiment," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 715-739, October.
    3. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," Working Papers 182, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    4. Doug Miller & A. Colin Cameron & Jonah B. Gelbach, 2006. "Bootstrap-Based Improvements for Inference with Clustered Errors," Working Papers 621, University of California, Davis, Department of Economics.
    5. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    6. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    7. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
    8. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
    9. Wydick, Bruce, 2001. "Group Lending under Dynamic Incentives as a Borrower Discipline Device," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 406-20, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:jec:journl:v:9:y:2013:i:2:p:153-184. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.