Promoting access to credit for small uncollateralized producers: moral hazard, subsidies and local externalities under different group lending market structures
We analyse equilibrium borrowers’ effort and cost of loan in microcredit in presence of moral hazard, project correlation and subsidies under group lending. Our results show that symmetric (asymmetric) project correlation has no (has significant) effects on borrowers’ effort, while subsidised lending raises it. These findings document that the well known negative effect of within group (symmetric) project correlation on group lending with joint liability disappears once endogenous effort is taken into account. We also analyse the effects of subsidised lending (and asymmetric correlation) on the relative convenience (in terms of borrowers’ effort) of the alternative i) between group lending and individual lending with notional collateral, ii) among three different market structures of the microfinance industry.
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