Matching for Credit: Identifying Information Asymmetries in Joint-Liability Lending

Microcredit, a financial tool providing uncollateralized loans to low-income individuals, has seen a shift from joint-liability (JL) to individual liability (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 theoretical 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.

Klein, Thilo (2024), Matching for Credit: Identifying Information Asymmetries in Joint-Liability Lending, ZEW Discussion Paper Nr. 24-070, Mannheim.