Small business loans actually get paid back more often when the people in the group *don't* all have the same deal.
March 20, 2026
Original Paper
Reviving Joint Liability Contracts: Asymmetric Joint Liability Loans and Moral Hazard
SSRN · 6441736
The Takeaway
While traditional microfinance emphasizes 'joint liability' where everyone is equal, this paper shows that making one person a 'lead borrower' with different interest rates actually improves peer monitoring. This asymmetry solves the 'moral hazard' problem where equal group members often collude to default together.
From the abstract
We study the effects of asymmetric joint liability on peer monitoring, moral hazard, and default in microfinance. We develop a structural model of group lending under moral hazard and test its implications in a lab-in-the-field experiment with microfinance clients in urban Bolivia. The model shows that symmetric joint liability contracts can weaken incentives for peer monitoring and lead to coordinated defaults. By designating one group member as a lead borrower with differential interest rates,