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Cost Efficient Joint Liability Lending

Author

Listed:
  • Ralph-C Bayer

    (School of Economics, University of Adelaide)

  • Sujiphong Shatragom

    (School of Economics, University of Adelaide)

Abstract

Traditional micro-lending schemes suffer from high transaction costs relative to the loan size, which renders many small loans uneconomical. This paper proposes an alternative lending protocol with lower transaction costs and shows that in theory repayment rates are not compromised. We then use laboratory experiments to confirm this finding. Finally we conclude that our lending protocol if implemented could improve social welfare by reducing transaction cost.

Suggested Citation

  • Ralph-C Bayer & Sujiphong Shatragom, 2013. "Cost Efficient Joint Liability Lending," School of Economics and Public Policy Working Papers 2013-23, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2013-23
    as

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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2013-23.pdf
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    References listed on IDEAS

    as
    1. Peter Werner, 2010. "The Dynamics of Cooperation in Group Lending - A Microfinance Experiment," Working Paper Series in Economics 49, University of Cologne, Department of Economics.
    2. Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.
    3. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
    4. Xavier Giné & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010. "Microfinance Games," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 60-95, July.
    5. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    6. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-631, July.
    7. Klaus Abbink & Bernd Irlenbusch & Elke Renner, 2006. "Group Size and Social Ties in Microfinance Institutions," Economic Inquiry, Western Economic Association International, vol. 44(4), pages 614-628, October.
    8. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," The World Bank Economic Review, World Bank, vol. 4(3), pages 351-366, September.
    9. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    10. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    11. Bhole, Bharat & Ogden, Sean, 2010. "Group lending and individual lending with strategic default," Journal of Development Economics, Elsevier, vol. 91(2), pages 348-363, March.
    12. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Sahabudin Sidiq & Herawati, 2016. "Validity test of purchasing power parity doctrine: An Indonesian case study," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 8(2), pages 120-127, April.
    2. Ghana Atma Sulistya & Darwanto, 2016. "Transaction cost of micro and small enterprises financing," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 8(2), pages 171-186, April.

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    More about this item

    Keywords

    microfinance; group lending; group liability; joint liability.;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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