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Group lending without joint liability

Listed author(s):
  • de Quidt, Jonathan
  • Fetzer, Thiemo
  • Ghatak, Maitreesh

This paper contrasts individual liability lending with and without groups to joint liability lending. We are motivated by an apparent shift away from the use of joint liability by microfinance institutions, combined with recent evidence that a) converting joint liability groups to individual liability groups did not affect repayment rates, and b) an intervention that increased social capital in individual liability borrowing groups led to improved repayment performance. First, we show that individual lending with or without groups may constitute a welfare improvement over joint liability, so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how the lender's lower transaction costs in group lending can encourage insurance by reducing the amount borrowers have to pay to bail one another out. Third, we discuss how group meetings might encourage insurance, either by increasing the incentive to invest in social capital, or because the time spent in meetings can facilitate setting up insurance arrangements. Finally, we perform a simple simulation exercise, evaluating quantitatively the welfare impacts of alternative forms of lending and how they relate to social capital.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304387814001412
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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 121 (2016)
Issue (Month): C ()
Pages: 217-236

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Handle: RePEc:eee:deveco:v:121:y:2016:i:c:p:217-236
DOI: 10.1016/j.jdeveco.2014.11.006
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
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