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To switch or not to switch - Can individual lending do better in microfinance than group lending?

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  • Helke Waelde

    ()
    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

Abstract

These days it has been witnessed, that banks other individual loans instead of group loans and develop products based on individual liability in developing coun- tries. In order to study this surprising turn, we expand the conventional approach on decision making of individuals. A social prestige function is introduced that re- ‡ects the non-monetary impacts of group membership on the individual and on her decisions. If a borrower possesses more than a critical level of wealth, it is optimal for her to switch to individual borrowing. From a welfare perspective, a mixture of individual and group loans is desirable. However, the average borrower switches from group to individual lending too soon.

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File URL: http://www.macro.economics.uni-mainz.de/RePEc/pdf/Discussion_Paper_1106.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz in its series Working Papers with number 1106.

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Length: 27 pages
Date of creation: 07 Mar 2011
Date of revision: 07 Mar 2011
Handle: RePEc:jgu:wpaper:1106

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