Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This paper provides an empirical analysis of joint‐liability micro‐lending contracts. Using our data set, we examine the efficacy of various incentives set by this contract such as joint‐liability between groups of borrowers or group access to future and to larger loans. As proposed by theory, we find that joint liability induces a group formation of low risk borrowers. After the loan disbursement, the incentive system leads to peer monitoring, peer support and peer pressure between the borrowers, thus helping the lending institution to address the moral hazard and enforcement problem. This paper also demonstrates that the mechanism realizes repayment rates of nearly 100% if the loan officers fulfill their complementary duties in the screening and enforcement process. Finally, we make clear that dynamic incentives, in contrast to theory, have to be restricted if the two long‐term problems of the joint‐liability approach, i.e. its mismatching problem and the domino effect, are to be tackled notably.