Speaker
Description
While joint-liability lending has been central to microfinance since the 1970s, recent evidence indicates that this mechanism has fallen short of its promise to reduce loan defaults and operational costs. Since borrowers of joint-liability loans commonly face symmetric contract terms, group members are subject to coordination and free-riding problems. Peers might enforce each other to repay their loans, but might also free-ride or jointly default. We propose that asymmetric joint-liability microfinance loan contracts are a suitable instrument to increase monitoring efforts and thereby repayment rates. With such asymmetric contracts, one borrower becomes an optimally incentivized lead-borrower (group-leader) through asymmetric interest rates, which is hypothesized to increase monitoring efforts and thereby reduce moral hazard of all group members. We rely on the theoretical model of Carli and Uras (2017) for a lending framework with ex-ante moral hazard and extend it to capture a lending scenario with ex-post moral hazard. We then test the impact of asymmetric loans in ex-ante and ex-post moral hazard contexts by means of a lab-in-the-field experiment with microfinance clients in urban Bolivia. The experimental results show that asymmetric loans (and incentivized group loan leaders) increase the incidence of monitoring in both moral-hazard scenarios by 9-13 percentage points. Overall, our findings suggest that assigning asymmetric roles within joint-liability groups and incentivizing a group leader can effectively address a broad range of moral hazard issues and enhance the stability of microfinance programs.
| Keyword | Financial Inclusion and Microfinance |
|---|
