Group lending and self-help groups: joint benefit as an alternative governance mechanism
Lending to the rural poor in developing economies, although crucial from the perspective of poverty management, is often subjected to severe informational problems. The literature on group lending with joint liability attempts to resolve these problems by making failure more costly for the borrowers. We take a different approach. In a model of lending with moral hazard, we show that rewarding group success by promising a joint benefit can be used as an alternative mechanism to solve informational problems. We also show that, unlike joint liabilitymechanism, this joint-benefit mechanism would ensure higher repayment probability even in the absence of peer-monitoring. Moreover, in this model, the optimal group size can be endogenously determined.
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Volume (Year): 17 (2008)
Issue (Month): 1 ()
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