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Peer Group Formation in an Adverse Selection Model

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Author Info
de Aghion, Beatriz Armendariz
Gollier, Christian

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Abstract

This paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification (or auditing) by banks is costly. Peer group formation reduces interest rates due to a "collateral effect", namely, cross subsidisation amongst borrowers acts as collateral behind a loan. By uncovering such a collateral effect, this paper shows that peer group systems can be viewed as an effective risk pooling mechanism, and thus enhance efficiency, not just in the full information set up.

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

Volume (Year): 110 (2000)
Issue (Month): 465 (July)
Pages: 632-43
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Handle: RePEc:ecj:econjl:v:110:y:2000:i:465:p:632-43

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  1. Valentina Hartarska & Steven B. Caudill & Daniel M. Gropper, 2006. "The Cost Structure Of Microfinance Institutions In Eastern Europe And Central Asia," William Davidson Institute Working Papers Series wp809, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  2. Jhilam Zebunnessa Iqbal, 2002. "The Impact of Grameen Bank Credit on the Levels of Income, Employment, and Productivity of Poor Landless Households in Rural Bangladesh," Fordham Economics Dissertations 2002.5, Fordham University, Department of Economics. [Downloadable!]
  3. Laffont, Jean-Jacques & Rey, Patrick, 2003. "Moral Hazard, Collusion and Group Lending," IDEI Working Papers 122, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance Games," Working Papers 2102, The Field Experiments Website. [Downloadable!]
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  5. Karlan, Dean S., 2007. "Social Connections and Group Banking," CEPR Discussion Papers 6194, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. 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!]
  7. Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Working Papers 03-33, Bank of Canada. [Downloadable!]
  8. Laffont, Jean-Jacques, 2000. "Collusion and Group Lending with Adverse Selection," IDEI Working Papers 95, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  9. Pagura, Maria E., 2002. "The Hazard Of Client Exit In Microfinance," 2002 Annual meeting, July 28-31, Long Beach, CA 19698, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  10. Alessandra Cassar & Lucas Crowley & Bruce Wydick, 2005. "The Effect of Social Capital on Group Loan Repayment: Evidence from Artefactual Field Experiments," Artefactual Field Experiments 0032, The Field Experiments Website. [Downloadable!]
  11. Busetta, Giovanni & Presbitero, Andrea F., 2008. "Confidi, Piccole Imprese E Banche: Un'Analisi Empirica
    [Mutual Loan-Guarantee Societies, Small Firms and Banks: An Empirical Investigation]    ," MPRA Paper 7832, University Library of Munich, Germany. [Downloadable!]
  12. Seth Carpenter & Loic Sadoulet, 2000. "Risk-Matching in Credit Groups: Evidence from Guatemala," Econometric Society World Congress 2000 Contributed Papers 1310, Econometric Society. [Downloadable!]
  13. Ashok S. Rai & Tomas Sjostrom, . "Is Grameen Lending Efficient?," CID Working Papers 40, Center for International Development at Harvard University. [Downloadable!]
  14. Becchetti Leonardo & Pisani Fabio, 2006. "Microfinance with divisible investment projects," Departmental Working Papers 242, Tor Vergata University, CEIS. [Downloadable!]
  15. Yan Liu & Guang???Zhen Sun, 2008. "Competition And Access Regulation In The Telecommunications Industry With Multiple Networks," Monash Economics Working Papers 25/08, Monash University, Department of Economics. [Downloadable!]
  16. 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!]
  17. Dessi, Roberta & Piccolo, Salvatore, 2009. "Two is Company, N is a Crowd? Merchant Guilds and Social Capital," IDEI Working Papers 529, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  18. Dyuti Banerjee & Anupama Sethi, 2008. "Intra-Group Transfers And Group Formation," Monash Economics Working Papers 24/08, Monash University, Department of Economics. [Downloadable!]
  19. M. Kugler & R. Oppes, 2005. "Collateral and Risk Sharing in group lending: evidence from an urban microcredit program," Working Paper CRENoS 200509, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
  20. Jochen Runde, 2002. "Filling in the Background," Journal of Economic Methodology, Taylor and Francis Journals, vol. 9(1), pages 11-30, March. [Downloadable!] (restricted)
  21. 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!]
  22. 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!]
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