Asymmetric Group Loan Contracts: Experimental Evidence

Abstract

We design an experiment to study the role of (a)symmetry in the context of group lending with joint liability. The performance of joint-liability contracts crucially hinges on borrowers engaging in peer monitoring. We find that asymmetric contracts, in which monitoring is a dominant strategy for one borrower, increase the monitoring rate, and thus the repayment rate and performance. Moreover, asymmetric contracting also increases expected profits of the lending institution. Overall, our results suggest that asymmetric joint-liability contracts are worth considering as part of a policy to maintain financial stability.