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Group-lending with sequential financing, joint liability and social capital

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  • Prabal Roy Chowdhury

    ()
    (Indian Statistical Institute, New Delhi)

Abstract

We examine group-lending under sequential financing. In a model with moral hazard, social capital and endogenous group formation, we identify conditions such that sequential financing with joint liability leads to positive assortative matching between borrowers with and without social capital and, moreover, `bad' borrowers are partially screened out, thus resolving the moral hazard problem to some extent. Further, if the later loans are not too delayed, then under these conditions the expected payoff of the bank is greater compared to that under joint liability lending. Positive assortative matching or sequential financing (specially in the absence of joint liability) are no panacea though.

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Bibliographic Info

Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 04-23.

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Length: 34 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:ind:isipdp:04-23

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Keywords: Group-lending; sequential financing; joint liability; social capital; assortative matching; endogenous group formation;

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  1. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
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  10. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
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  13. 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.
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