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Matching for Credit: Identifying information asymmetries in joint-liability lending

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  • Klein, Thilo

Abstract

Microcredit, a financial tool providing uncollateralized loans to low-income individuals, has seen a shift from joint-liability (JL) to individual liabil- ity (IL) lending models. This article tests a theory explaining this shift, focusing on borrowers matching into groups exposed to similar economic shocks under JL, diminishing its effectiveness. I reconcile conflicting theo- retical predictions and propose an empirical strategy to distinguish adverse selection from moral hazard effects. Using data from Thailand, I find that increasing diversity within borrower groups leads to a 10 percentage point improvement in timely repayment. These results inform contract design and strategies to reduce information asymmetries in lending practices

Suggested Citation

  • Klein, Thilo, 2024. "Matching for Credit: Identifying information asymmetries in joint-liability lending," ZEW Discussion Papers 24-070, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:312189
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    More about this item

    Keywords

    microcredit; joint liability; diversification; market design; stable matching; endogeneity; selection model; agriculture; Thailand;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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