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Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect

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Author Info
Ghatak, Maitreesh
Abstract

We look at an economic environment where borrowers have some information about the nature of each other's projects that lenders do not. We show that joint-liability lending contracts, similar to those used by credit cooperatives and group-lending schemes, will induce endogenous peer selection in the formation of groups in a way that the instrument of joint liability can be used as a screening device to exploit this local information. This can improve welfare and repayment rates if standard screening instruments such as collateral are unavailable.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 110 (2000)
Issue (Month): 465 (July)
Pages: 601-31
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Handle: RePEc:ecj:econjl:v:110:y:2000:i:465:p:601-31

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  2. Andreas Madestam, 2009. "Informal Finance: A Theory of Moneylenders," Working Papers 2009.69, Fondazione Eni Enrico Mattei. [Downloadable!]
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  3. Joe Chen & Yun Jeong Choi & Yasuyuki Sawada, 2007. "Joint Liability Borrowing and Suicide," CIRJE F-Series CIRJE-F-534, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  4. Joe Chen & Yun Jeong Choi & Kohta Mori & Yasuyuki Sawada & Saki Sugano, 2009. "Socio-Economic Studies on Suicide: A Survey," CIRJE F-Series CIRJE-F-629, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  5. Prabal Roy Chowdhury, 2006. "Group-lending with sequential financing, contingent renewal and social capital," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 06-01, Indian Statistical Institute, New Delhi, India. [Downloadable!]
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  6. Karlan, Dean S., 2007. "Social Connections and Group Banking," CEPR Discussion Papers 6194, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Timothy N. Cason & Lata Gangadharan & Pushkar Maitra, 2008. "Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment," Purdue University Economics Working Papers 1208, Purdue University, Department of Economics. [Downloadable!]
  8. Rajkamal Iyer & Asim Ijaz Khwaja & Erzo F.P. Luttmer & Kelly Shue, 2009. "Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?," NBER Working Papers 15242, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank. [Downloadable!]
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  10. Kauko, Karlo, 2007. "Managers and efficiency in banking," Research Discussion Papers 11/2007, Bank of Finland. [Downloadable!]
  11. Christopher J. Green & Colin H. Kirkpatrick & Victor Murinde, 2006. "Finance for small enterprise growth and poverty reduction in developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(7), pages 1017-1030. [Downloadable!]
  12. Becchetti Leonardo & Pisani Fabio, 2006. "Microfinance with divisible investment projects," Departmental Working Papers 242, Tor Vergata University, CEIS. [Downloadable!]
  13. Becchetti Leonardo & Pisani Fabio, 2007. "Promoting access to credit for small uncollateralized producers: moral hazard, subsidies and local externalities under different group lending market structures," Departmental Working Papers 249, Tor Vergata University, CEIS. [Downloadable!]
  14. Jochen Runde, 2002. "Filling in the Background," Journal of Economic Methodology, Taylor and Francis Journals, vol. 9(1), pages 11-30, March. [Downloadable!] (restricted)
  15. Beatriz Armendariz & Ariane Szafarz, 2009. "On Mission Drift In Microfinance Institutions," Working Papers CEB 09-015.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  16. Christian Ahlin & Robert Townsend, 2003. "Selection into and across Credit Contracts: Theory and Field Research," Working Papers 0323, Department of Economics, Vanderbilt University. [Downloadable!]
  17. Soyolmaa Batbekh and & Keith Blackburn, 2008. "On the Macroeconomics of Microfi?nance," Centre for Growth and Business Cycle Research Discussion Paper Series 106, Economics, The Univeristy of Manchester. [Downloadable!]
  18. Prabal Roy Chowdhury, 2004. "Group-lending with sequential financing, joint liability and social capital," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 04-23, Indian Statistical Institute, New Delhi, India. [Downloadable!]
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