Key Factors of Joint-liability Loan Contracts an Empirical Analysis

This paper provides an empirical analysis of joint-liability micro-lending contracts. Using our data set from Constanta (a Georgian micro-lender), we examine the efficacy of various incentives set by this contract such as joint-liability between groups of borrowers or group access to future and to larger loans. As proposed by theory, we find that joint liability induces a group formation where better-risk borrowers team up with better-risk borrowers before the loan contract is concluded. After the loan disbursement, parts of the incentive system lead to peer monitoring, peer support and peer pressure between the borrowers, thus helping the lending institution to address the moral hazard and enforcement problem. This paper also demonstrates that the mechanism realizes repayment rates of nearly 100%, if the loan officers fulfill their complementary duties in the screening and enforcement process. Finally, we make clear that dynamic incentives, in contrast to theory, have to be restricted if the two long-term problems of the joint-liability lending mechanism, i.e. its mismatching problem and the domino effect, are to be tackled notably. Mailing address: Alexander S. Kritikos Fakultät für Wirtschaftswissenschaften Große Scharrnstr. 59 Europa-Universität Viadrina 15230 Frankfurt (Oder) Germany [email protected] 1 We are very grateful for the comments and suggestions of Martin Bohl, Friedel Bolle, Yves Breitmoser, Marco Caliendo, Jan Krahnen, Dieter Nautz, Magdalena Swiniarska, Sophie Schlondorff and two anonymous referees, as well as of the Seminar participants in Athens, Berlin, Frankfurt (Main), Frankfurt (Oder), Leipzig and of the Sozialwissenschaftlicher Ausschuss des Vereins für Socialpolitik in Koblenz. We would also like to thank Giorgi Nadareishvili for the support in the field as well as the team and the borrowers of Constanta who agreed to participate in the questionnaire and who were helpful in many ways, when we designed and conducted the empirical research. Vigenina also thanks for the financial support of Deutsche Bank Stiftung.