Microcredit Contracts, Risk Diversifi cation and Loan Take-Up
Social Science Research Network
We study theoretically and empirically the demand for microcredit under dierent liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then oers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on
... riskiness of projects. Using data from a randomized controlled trial in Mongolia we nd that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts, this eect is muted in villages where joint-liability loans are available. JEL: D14, D81, D86, G21, O16 * The authors thank Maitreesh Ghatak, Rachid Laajaj, Nathaniel Young and seminar participants at the Institute for Fiscal Studies (IFS) and Maastricht University for useful comments. Teodora Tsankova provided excellent research assistance. Any errors are the responsibility of the authors. The opinions expressed in this paper are those of the authors and do not necessarily represent the views of the EBRD. The related RCT is registered on www.socialscienceregistry.org under number AEARCTR-0000303.