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Group-lending: Sequential financing, lender monitoring and joint liability

  • Chowdhury, Prabal Roy

We develop a simple model of group-lendingbased on peer monitoring and moral hazard. We find that, in the absence of sequential financing or lender monitoring, group-lending schemes may involve under-monitoring with the borrowers investing in undesirable projects. Moreover, under certain parameter configurations, group-lending schemes involving either sequential financing, or a combination of lender monitoringand joint liability are feasible. In fact, group-lending schemes with sequential financing may succeed even in the absence of joint liability, though the repayment rate will be lower. In the absence of joint liability, however, group-lending with lender monitoring is unlikely to be feasible.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 77 (2005)
Issue (Month): 2 (August)
Pages: 415-439

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Handle: RePEc:eee:deveco:v:77:y:2005:i:2:p:415-439
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  14. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
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