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Group lending and individual lending with strategic default

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  • Bhole, Bharat
  • Ogden, Sean
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    Abstract

    Papers that compare group lending and individual lending in the presence of strategic default suggest that unless group members can impose costly social sanctions on one another, or unless the bank uses cross-reporting mechanisms group lending may do worse than individual lending. In this paper, we show that if, (1) the amount that a successful borrower owes for his defaulting partner is optimally determined, and (2) the penalty is allowed to vary across group members, then even in the absence of any social sanctions or cross-reporting, (1) expected borrower welfare is strictly higher with group lending when both group lending and individual lending are feasible and (2) group lending is feasible for a greater range of opportunity cost of capital. These results are robust to collusion between borrowers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 91 (2010)
    Issue (Month): 2 (March)
    Pages: 348-363

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    Handle: RePEc:eee:deveco:v:91:y:2010:i:2:p:348-363

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    Web page: http://www.elsevier.com/locate/devec

    Related research

    Keywords: Group lending Individual lending Strategic default Collusion Joint liability Microfinance;

    References

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    1. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 79-104, October.
    2. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
    3. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
    4. Priya Basu, 2006. "Improving Access to Finance for India's Rural Poor," World Bank Publications, The World Bank, number 6927, October.
    5. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers, Economic Growth Center, Yale University 940, Economic Growth Center, Yale University.
    6. Laffont, Jean-Jacques, 2000. "Collusion and Group Lending with Adverse Selection," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 95, Institut d'Économie Industrielle (IDEI), Toulouse.
    7. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(465), pages 632-43, July.
    8. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, Elsevier, vol. 46(1), pages 1-18, February.
    9. Alexander Tedeschi, Gwendolyn, 2006. "Here today, gone tomorrow: Can dynamic incentives make microfinance more flexible?," Journal of Development Economics, Elsevier, Elsevier, vol. 80(1), pages 84-105, June.
    10. Pitt, M.M. & Khandker, S.R., 1996. "Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh," World Bank - Discussion Papers, World Bank 320, World Bank.
    11. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 4(3), pages 351-66, September.
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    Citations

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    Cited by:
    1. Baland, Jean-Marie & Somanathan, Rohini & Wahhaj, Zaki, 2011. "Repayment incentives and the distribution of gains from group lending," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8197, C.E.P.R. Discussion Papers.
    2. Attanasio, O. & Augsburg, B. & Haas, R. de & Fitzsimons, E. & Harmgart, H., 2013. "Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Rural Mongolia," Discussion Paper, Tilburg University, Center for Economic Research 2013-074, Tilburg University, Center for Economic Research.
    3. 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.
    4. Attanasio, Orazio & Augsburg, Britta & de Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2014. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," Discussion Papers, Research Unit: Economics of Change SP II 2014-303, Social Science Research Center Berlin (WZB).
    5. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2012. "Market Structure and Borrower Welfare in Microfinance," STICERD - Economic Organisation and Public Policy Discussion Papers Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 40, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    6. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Working Papers 2014-07, University of Sydney, School of Economics.
    7. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2013. "Group Lending Without Joint Liability," STICERD - Economic Organisation and Public Policy Discussion Papers Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 44, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    8. Renuka Sane & Susan Thomas, 2012. "What should regulation do in the field of micro-finance?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    9. Altınok, Ahmet & Sever, Can, 2014. "Efficient Microlending without Joint Liability," MPRA Paper 56598, University Library of Munich, Germany.
    10. Khoi, Phan Dinh & Gan, Christopher & Nartea, Gilbert V. & Cohen, David A., 2013. "Formal and informal rural credit in the Mekong River Delta of Vietnam: Interaction and accessibility," Journal of Asian Economics, Elsevier, vol. 26(C), pages 1-13.
    11. Kurosaki, Takashi & Khan, Hidayat Ullah, 2011. "Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan," PRIMCED Discussion Paper Series, Institute of Economic Research, Hitotsubashi University 10, Institute of Economic Research, Hitotsubashi University.

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