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

We examine partner selection decision in the formation of borrowing group in joint-liability-based microcredit. We do so within the context of framed field experiments conducted in Bangladesh. We find that when joint-liability payments are made using money from the borrower’s mandatory savings account, risky borrowers display a willingness to offer side payments that are sufficiently large o attract safe borrowers to form groups. Many important theoretical results in microcredit are based solely on the assumption of homogeneous risk-matched borrowing groups. Therefore, we argue that it is important to allow for the likelihood of heterogeneous risk-matched groups in theoretical research.