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Reviving Joint Liability Contracts: Asymmetric Joint Liability Loans and Moral Hazard

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Abstract

" We study the effects of asymmetric joint liability on peer monitoring, moral hazard, and default in microfinance. We develop a structural model of group lending under moral hazard and test its implications in a lab-in-the-field experiment with microfinance clients in urban Bolivia. The model shows that symmetric joint liability contracts can weaken incentives for peer monitoring and lead to coordinated defaults. By designating one group member as a lead borrower with differential interest rates, asymmetric joint liability restores monitoring incentives and mitigates moral hazard. Consistent with the model, experimental evidence shows that asymmetric joint liability contracts increase peer monitoring and loan repayment, particularly among borrowers who find joint liability acceptable."

Suggested Citation

  • Burak Uras & Francesco Carli & Francesco Cecchi & Manuela Fritz, 2026. "Reviving Joint Liability Contracts: Asymmetric Joint Liability Loans and Moral Hazard," Department of Economics Working Papers 2026_106, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2026_106
    DOI: 10.36934/wecon:2026_106
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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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