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Mutual Loan-Guarantee Societies in Credit Markets with Adverse Selection: Do They Act as a Sorting Device?

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Author Info

  • Giovanni BUSETTA

    ()
    (Universit… di Napoli "Parthenope")

  • Alberto ZAZZARO

    ()
    (Universita' Politecnica delle Marche, Dipartimento di Economia)

Abstract

Mutual Loan Guarantee Societies (MLGSs) are crucial players in credit markets of many European and non-European countries. In this paper we provide a theory to rationalize the raison d'e'tre of MLGSs. The basic intuition is that the foundation for MLGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough collateralizable wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MLGSs as a wealth pooling mechanism that allows otherwise inefficiently rationed borrowers to obtain credit. We focus on the case of large, complex urban economies where potential entrepreneurs are numerous and possess no more information about each other than do banks. Despite our extreme assumption on information availability, we show that MLGSs can be characterized by assortative matching in which only safe borrowers have an incentive to join the mutual society. In the last section, we show that the available evidence on the structure and performance of MLGSs active in Italy is consistent with some implications of our theory concerning their diffusion, the average number of their associates and the average default rate on guaranteed loans in developed and backward regions.

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File URL: http://docs.dises.univpm.it/web/quaderni/pdf/273.pdf
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Bibliographic Info

Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 273.

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Length: 30
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:anc:wpaper:273

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Related research

Keywords: group information; mutual loan guarantee society; small business lending;

References

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  1. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  2. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
  3. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  4. 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 601-31, July.
  5. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
  6. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
  7. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  8. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  9. Maitreesh Ghatak & Raja Kali, 2001. "Financially Interlinked Business Groups," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 591-619, December.
  10. Shubhashis Gangopadhyay & Maitreesh Ghatak & Robert Lensink, 2005. "Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 115(506), pages 1005-1015, October.
  11. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-43, July.
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Citations

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Cited by:
  1. 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.
  2. Fabio FIORILLO & Agnese SACCHI, 2010. "I Want to Free-ride. An Opportunistic View on Decentralization Versus Centralization Problem," Working Papers 346, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  3. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Ugo FRATESI, 2010. "The National and International Effects;of Regional Policy Choices: Agglomeration Economies, Peripherality and Territorial Characteristics," Working Papers 344, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  5. Luca RICCETTI, 2010. "Minimum Tracking Error Volatility," Working Papers 340, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  6. Petraglia, Carmelo & Amaturo, Francesca & Giordano, Luca, 2009. "Divari territoriali e limiti nell’accesso al credito per le PMI meridionali: quale ruolo per i Confidi?
    [Credit constraints for SMEs in the Italian Mezzogiorno: which role for Mutual Loan-Guarant
    ," MPRA Paper 15210, University Library of Munich, Germany.

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