Default Contagion in Group Lending

Group lending and joint liability are central features of microfinance, designed to reduce non‑payment risk. However, they may also generate default contagion, where non‑payment by one borrower reduces repayment by other group members. Exploiting unexpected deaths among borrowers as a source of exogenous shocks, the authors estimate how one member’s default affects repayment behavior within the group. They find that more than just the directly affected loan is at risk: defaults can spread to groupmates, implying that joint liability contracts may unintentionally amplify repayment problems even as they aim to prevent them.