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Joint-liability with endogenously asymmetric group loan contracts

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  • Carli, Francesco
  • Uras, Burak R.

Abstract

Group lending is a common practice that Microfinance Institutions (MFIs) utilize when lending to individuals without collateral. We develop a multi-agent principal-agent model with costly peer monitoring and solve for the optimal group loan contract. The optimal contract exhibits (i) a joint-liability scheme; and, (ii) asymmetric loan terms which can be interpreted as appointing a group leader, who has strong incentives to monitor her peer. Relaxing the joint-liability scheme implies the breakdown of equilibrium monitoring. When the contractual asymmetry is relaxed, the peer-monitoring game exhibits multiple Nash equilibria: a (weak) good equilibrium at which borrowers monitor each other and a (strong) bad equilibrium without monitoring. This key result suggests that profit maximizing MFIs should provide asymmetric group loan contracts - even to a homogeneous group of borrowers - to ensure stability in repayment rates.

Suggested Citation

  • Carli, Francesco & Uras, Burak R., 2017. "Joint-liability with endogenously asymmetric group loan contracts," Journal of Development Economics, Elsevier, vol. 127(C), pages 72-90.
    • Handle: RePEc:eee:deveco:v:127:y:2017:i:c:p:72-90
    DOI: 10.1016/j.jdeveco.2017.03.003
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    Cited by:

    1. Carli, Francesco & Suetens, Sigrid & Uras, Burak & Visser, Philine, 2021. "Asymmetric Group Loan Contracts : Experimental Evidence," Other publications TiSEM 918d8091-4038-4d14-af04-8, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Microfinance; Joint-liability; Group leader;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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