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Group lending and individual lending with strategic default

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  • Bhole, Bharat
  • Ogden, Sean

Abstract

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.

Suggested Citation

  • Bhole, Bharat & Ogden, Sean, 2010. "Group lending and individual lending with strategic default," Journal of Development Economics, Elsevier, vol. 91(2), pages 348-363, March.
    • Handle: RePEc:eee:deveco:v:91:y:2010:i:2:p:348-363
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Journal of Development Economics, Elsevier, vol. 111(C), pages 167-180.
    2. Altınok, Ahmet & Sever, Can, 2014. "Efficient Microlending without Joint Liability," MPRA Paper 56598, University Library of Munich, Germany.
    3. repec:eee:jjieco:v:33:y:2014:i:c:p:96-113 is not listed on IDEAS
    4. Ralph-C Bayer & Sujiphong Shatragom, 2013. "Cost Efficient Joint Liability Lending," School of Economics Working Papers 2013-23, University of Adelaide, School of Economics.
    5. Baland, Jean-Marie & Somanathan, Rohini & Wahhaj, Zaki, 2013. "Repayment incentives and the distribution of gains from group lending," Journal of Development Economics, Elsevier, vol. 105(C), pages 131-139.
    6. Attanasio, O.P. & Augsburg, B. & de Haas, R. & Fitzsimons, E. & Harmgart, H., 2013. "Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Rural Mongolia," Discussion Paper 2013-074, Tilburg University, Center for Economic Research.
    7. Ahlin, Christian & Waters, Brian, 2016. "Dynamic microlending under adverse selection: Can it rival group lending?," Journal of Development Economics, Elsevier, vol. 121(C), pages 237-257.
    8. Attanasio, O. & Augsburg, B. & de Haas, Ralph, 2016. "Microcredit Contracts, Risk Diversification and Loan Take-Up," Discussion Paper 2016-020, Tilburg University, Center for Economic Research.
    9. Hisaki KONO & Kazushi TAKAHASHI, 2010. "Microfinance Revolution: Its Effects, Innovations, And Challenges," The Developing Economies, Institute of Developing Economies, vol. 48(1), pages 15-73.
    10. Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.
    11. Hussain, A.K.M. Ghulam & Nargis, Nigar & Ashiquzzaman, S.M. & Khalil, Fahad, 2017. "The employment impact of microcredit program participation in Bangladesh: Evidence from a longitudinal household survey," GLO Discussion Paper Series 59, Global Labor Organization (GLO).
    12. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2016. "Group lending without joint liability," Journal of Development Economics, Elsevier, vol. 121(C), pages 217-236.
    13. Khoi, Phan Dinh & Gan, Christopher & Nartea, Gilbert V. & Cohen, David A., 2013. "Formal and informal rural credit in the Mekong River Delta of Vietnam: Interaction and accessibility," Journal of Asian Economics, Elsevier, vol. 26(C), pages 1-13.
    14. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2012. "Market Structure and Borrower Welfare in Microfinance," CEPR Discussion Papers 9165, C.E.P.R. Discussion Papers.
    15. Hameem Raees Chowdhury, 2016. "Joint-Liability in Microcredit: Evidence from Bangladesh," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 105-129, March.
    16. Shyamal Chowdhury & Prabal Roy Chowdhury & Kunal Sengupta, 2014. "Sequential lending with dynamic joint liability in micro-finance," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 14-07, Indian Statistical Institute, New Delhi, India.
    17. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    18. repec:cep:stieop:44 is not listed on IDEAS
    19. Orazio Attanasio & Britta Augsburg & Ralph De Haas & Emla Fitzsimons & Heike Harmgart, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," IFS Working Papers W11/20, Institute for Fiscal Studies.
    20. Renuka Sane & Susan Thomas, 2012. "What should regulation do in the field of micro-finance?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    21. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    22. Kurosaki, Takashi & Khan, Hidayat Ullah, 2011. "Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan," PRIMCED Discussion Paper Series 10, Institute of Economic Research, Hitotsubashi University.

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