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Reputation, Trust and the Logic of Group Lending

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  • Joel M. Guttman

Abstract

This paper analyzes the interaction between the success of group lending institutions and the stock of social capital (modeled by the level of trust) in the community where the group lending programs are located. Agents play a finitely repeated 'trust game' in parallel with a finitely repeated 'microcredit game' There are two agent types: 'regular' and 'trustworthy,' and these types are private information. Moral hazard problems are present in both games. The model shows that there are conditions under which the presence of trust as an equilibrium of the trust game can enhance the success of the group lending program. Similarly, there are conditions under which success of the group lending program can enhance the development of trust.

Suggested Citation

  • Joel M. Guttman, 2010. "Reputation, Trust and the Logic of Group Lending," NFI Working Papers 2010-WP-02, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2010-wp-02
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    References listed on IDEAS

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    Cited by:

    1. Jean-Marie Baland & Rohini Somanathan & Zaki Wahhaj, 2014. "Group Lending and Endogenous Social Sanctions," Studies in Economics 1415, School of Economics, University of Kent.

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    More about this item

    Keywords

    Microfinance; microcredit; group lending; social capital; trust; reputation;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Z1 - Other Special Topics - - Cultural Economics

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