經濟與管理論叢(Journal of Economics and Management)  
  Volume 9, No. 2  
  July, 2013  
     
 

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.

 
   

 

Abstract
 

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.

 

     
     
 

Keywords: joint-liability lending, microfinance, asymmetric information,

 

                   adverse selection, social capital, artefactual field experiment  
JEL classification: C9, O1

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