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Group lending, sorting, and risk sharing

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  • Altınok, Ahmet

Abstract

This paper studies group lending with joint-liability contracts offered by Microfinance Institutions (MFIs). We develop a model of group lending where heterogeneous agents form groups, obtain capital from the MFI, and share risks among themselves. We show that the composition of the groups is not always homogeneous once risk-sharing is introduced, rationalizing the empirical evidence of risk heterogeneity within groups. Moreover, we find that joint liability introduces inefficiency for risk-averse borrowers, which explains why MFIs are moving away from joint-liability contracts. Surprisingly, the first-best outcome can be achieved even in the presence of information asymmetry.

Suggested Citation

  • Altınok, Ahmet, 2023. "Group lending, sorting, and risk sharing," Games and Economic Behavior, Elsevier, vol. 140(C), pages 456-480.
    • Handle: RePEc:eee:gamebe:v:140:y:2023:i:c:p:456-480
    DOI: 10.1016/j.geb.2023.05.003
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    More about this item

    Keywords

    Group lending; Microfinance; Joint liability; Matching; Adverse selection;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G2 - Financial Economics - - Financial Institutions and Services
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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