Asymmetric Group Loan Contracts: Experimental Evidence

Francesco Carli, Sigrid Suetens, Burak Uras, Philine Visser

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Abstract

We design an experiment to study the role of (a)symmetry in the context of group lending with joint liability. The performance of joint-liability contracts crucially hinges on borrowers engaging in peer monitoring. We find that asymmetric contracts, in which monitoring is a dominant strategy for one borrower, increase the
monitoring rate, and thus the repayment rate and performance. Moreover, symmetric
contracting also increases expected profits of the lending institution. Overall, our results suggest that asymmetric joint-liability contracts are worth considering as part of a policy to maintain financial stability.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages30
Volume2021-024
Publication statusPublished - 23 Aug 2021

Publication series

NameCentER Discussion Paper
Volume2021-024

Keywords

  • group loan contracts
  • asymmetric contracts
  • joint liability
  • coordination game
  • microfinance
  • laboratory experiment

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