Social Identity and Group Lending
AbstractThe success of joint liability programs depends on nature and composition of borrowing groups. Group formation is a costly process and in our model these costs vary with the social identity of group partners. We show that risk heterogeneity in a borrowing group may arise due to the social identity of the agents. The presence of caste and gender bias may not resolve the adverse selection and moral hazard problems created by information asymmetry between the borrowers and the lender. We also find that with costly group formation and state verification, individual liability lending may be better than joint liability lending. Thus ignoring social identity and group formation costs can lead to the failure of a joint liability program. Finally, the paper also suggests that targeting different social groups requires the use of a menu of joint liability costs.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 405.
Length: 24 p.
Date of creation: 2004
Date of revision:
Group lending; Risk heterogeneity; Formation costs; Social identity;
Other versions of this item:
- Prabirendra Chatterjee & Sudipta, Sarangi, . "Social Identity and Group Lending," Working Papers UWEC-2005-06-R, University of Washington, Department of Economics.
- Sudipta Sarangi & Prabirendra Chatterjee, . "Social Identity and Group Lending," Departmental Working Papers 2004-01, Department of Economics, Louisiana State University.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-14 (All new papers)
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