Selection of Borrowing Partners in Joint Liability‐Based Microcredit: Evidence from Framed Field Experiments in Bangladesh

16 Pages Posted: 6 Jan 2015

Date Written: January 2015

Abstract

We analyze partner selection decisions in the formation of borrowing groups in joint liability‐based microcredit. We do so within the context of a framed field experiment with the owners of small businesses in rural Bangladesh. We find that when, irrespective of their project status, borrowers are required to make joint liability payments, risky borrowers will offer side payments that are sufficiently large to attract safe borrowers, leading to the formation of heterogeneous risk‐matched groups. We discuss the implications of heterogeneous risk matching for the survival and success of small enterprises, and their financiers, in countries with a weak institutional environment.

Suggested Citation

Shahriar, Abu Zafar and Chakravarty, Sugato, Selection of Borrowing Partners in Joint Liability‐Based Microcredit: Evidence from Framed Field Experiments in Bangladesh (January 2015). Entrepreneurship Theory and Practice, Vol. 39, Issue 1, pp. 129-144, 2015. Available at SSRN: https://ssrn.com/abstract=2545634 or http://dx.doi.org/10.1111/etap.12142

Abu Zafar Shahriar

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Sugato Chakravarty (Contact Author)

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

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