This study investigates the droplet dynamics at the lateral cloud–environment interface in shallow cumulus clouds. A mixing layer is used to study a small part of the cloud edge using direct numerical simulation combined with a Lagrangian particle tracking and collision algorithm. The effect of evaporation, gravity, coalescence, and the initial droplet size distribution on the intensity of the mixing layer and the evolution of the droplet size distribution is studied. Mixing of the droplets with environmental air induces evaporative cooling, which results in a very characteristic subsiding shell. As a consequence, stronger horizontal velocity gradients are found in the mixing layer, which induces more mixing and evaporation. A broadening of the droplet size distribution is observed as a result of evaporation and coalescence. Gravity acting on the droplets allows droplets in cloudy filaments detrained from the cloud to sediment and remain longer in the unsaturated environment. While this effect of gravity did not have a significant impact in this case on the mean evolution of the mixing layer, it does contribute to the broadening of the droplet size distribution and thereby significantly increases the collision rate. Although more but smaller droplets result in more evaporative cooling, more droplets also increase small-scale fluctuations and the production of turbulent dissipation. For the smallest droplets considered with a radius of 10 mm, the authors found that, although a more pronounced buoyancy dip was present, the increase in dissipation rate actually led to a decrease in the turbulent intensity of the mixing layer. Extrapolation of the results to realistic clouds is discussed.