Joint-liability and dynamic incentive mechanisms in microlending: Evidence from lab-in-the-field experiments in Thailand

Abstract

The mechanisms of joint liability and dynamic incentive in microfinance institutions are often cited as the key factors that lead to the low default rate in loan repayment in developing countries. The study tested the effects of joint-liability lending and dynamic incentive mechanisms on risk preferences and loan repayment. Through the conduct of microfinance lab-in-the-field experiments with 256 microfinance clients in Thailand, this study found that joint liability without dynamic incentive performs better than individual lending in terms of loan repayment. The dynamic incentive mechanism reduces risk-taking behavior and promotes loan repayment, however, combination of joint-liability and dy- namic incentives enhances moral hazard through risk-taking. Further, participants tended to be more risk-taking when they perceived that their partners were risk-lovers.