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Adverse selection and moral hazard in joint-liability loan contracts : evidence from an artefactual field experiment
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Barboni, Giorgia, Cassar, Alessandra, Trejo, Arturo Rodriguez and Wydick, Bruce (2013) Adverse selection and moral hazard in joint-liability loan contracts : evidence from an artefactual field experiment. Journal of Economics and Management, 9 (2). pp. 153-184. ISSN 1819-0197.
An open access version can be found in:
Official URL: http://www.jem.org.tw/
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.
| Item Type: | Journal Article | ||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | Journal of Economics and Management | ||||
| ISSN: | 1819-0197 | ||||
| Official Date: | July 2013 | ||||
| Dates: |
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| Volume: | 9 | ||||
| Number: | 2 | ||||
| Page Range: | pp. 153-184 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Open Access (Creative Commons) | ||||
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| Open Access Version: |
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