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Repayment Incentives And The Distribution Of Gains From Group Lending

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  • Jean-Marie Baland

    (University of Namur)

  • Rohini Somanathan

    (Department of Economics, Delhi School of Economics & Institute for Advanced Study, Princeton)

  • Zaki Wahhaj

    (University of Oxford)

Abstract

Group loans with joint liability have been a distinguishing feature of many micro nance programs. While such lending has bene tted millions of borrowers, major lending insti- tutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are o ered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and nd that bank enforcement is more e ective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare e ects of group size and nd that those requiring small loans are better served by larger groups but group size e ects are, in general, ambiguous.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 192.

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Length: 24 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:cde:cdewps:192

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Keywords: microcredit; joint-liability; group lending; repayment incentives; social sanctions.;

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References

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  1. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  2. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
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  8. 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.
  9. Matsuyama, Kiminori, 2000. "Endogenous Inequality," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 743-59, October.
  10. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
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  13. 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.
  14. 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, vol. 71(1), pages 217-234, 01.
  15. Alessandra Cassar & Luke Crowley & Bruce Wydick, 2007. "The effect of social capital on group loan repayment: evidence from field experiments," Economic Journal, Royal Economic Society, vol. 117(517), pages F85-F106, 02.
  16. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  17. Coleman, Brett E., 2006. "Microfinance in Northeast Thailand: Who benefits and how much?," World Development, Elsevier, vol. 34(9), pages 1612-1638, September.
  18. Ahlin, Christian & Townsend, Robert M., 2007. "Selection into and across credit contracts: Theory and field research," Journal of Econometrics, Elsevier, vol. 136(2), pages 665-698, February.
  19. Hermes, Niels & Lensink, Robert, 2011. "Microfinance: Its Impact, Outreach, and Sustainability," World Development, Elsevier, vol. 39(6), pages 875-881, June.
  20. Jonathan Morduch, 1998. "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh," Working Papers 198, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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Cited by:
  1. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2013. "Group Lending Without Joint Liability," STICERD - Economic Organisation and Public Policy Discussion Papers Series 44, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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