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.
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