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Group lending and individual lending with strategic default

  • Bhole, Bharat
  • Ogden, Sean
Registered author(s):

    Papers that compare group lending and individual lending in the presence of strategic default suggest that unless group members can impose costly social sanctions on one another, or unless the bank uses cross-reporting mechanisms group lending may do worse than individual lending. In this paper, we show that if, (1) the amount that a successful borrower owes for his defaulting partner is optimally determined, and (2) the penalty is allowed to vary across group members, then even in the absence of any social sanctions or cross-reporting, (1) expected borrower welfare is strictly higher with group lending when both group lending and individual lending are feasible and (2) group lending is feasible for a greater range of opportunity cost of capital. These results are robust to collusion between borrowers.

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    File URL: http://www.sciencedirect.com/science/article/B6VBV-4WJBC16-2/2/37380e69b773f7ea4715c2e497dbe582
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    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 91 (2010)
    Issue (Month): 2 (March)
    Pages: 348-363

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    Handle: RePEc:eee:deveco:v:91:y:2010:i:2:p:348-363
    Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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    1. Giné, Xavier & Karlan, Dean S., 2007. "Group versus Individual Liability: A Field Experiment in the Philippines," CEPR Discussion Papers 6193, C.E.P.R. Discussion Papers.
    2. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
    3. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-43, July.
    4. Pitt, M.M. & Khandker, S.R., 1996. "Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh," World Bank - Discussion Papers 320, World Bank.
    5. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    6. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
    7. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
    8. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
    9. Alexander Tedeschi, Gwendolyn, 2006. "Here today, gone tomorrow: Can dynamic incentives make microfinance more flexible?," Journal of Development Economics, Elsevier, vol. 80(1), pages 84-105, June.
    10. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, August.
    11. Priya Basu, 2006. "Improving Access to Finance for India's Rural Poor," World Bank Publications, The World Bank, number 6927.
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