Using Repayment Data to Test Across Models of Joint Liability Lending

Theories rationalizing joint liability lending are rich in implications for repayment rates. We exploit this fact to test four diverse models. We show that the models’ repayment implications do not always coincide. For example, higher correlation of output and borrowers’ ability to act cooperatively can raise or lower repayment, depending on the model. Data from Thai borrowing groups suggest that repayment is affected negatively by the joint liability rate (ceteris paribus) and social ties, and positively by the strength of local sanctions and correlated returns. Further, the relative fit of the adverse selection versus informal sanctions models varies by region. ∗We thank three anonymous referees, Francisco Buera, Jonathan Conning, Hidehiko Ichimura, Steve Levitt, Costas Meghir, Derek Neal, Sombat Sakuntasathien, seminar participants at Chicago, Groningen, London School of Economics, Southern California, University College London, Vanderbilt and at NEUDC 2001, ESSFM 2002, the 2002 European Economic Association meetings, LACEA 2003, and BREAD 2004 for valuable input. Financial support from the National Institutes of Health and the National Science Foundation (including its Graduate Research Fellowship Program) is gratefully acknowledged. All errors are ours.