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Group-lending with sequential financing, joint liability and social capital

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  • Prabal Roy Chowdhury

    (Indian Statistical Institute, New Delhi)

Abstract

We examine group-lending under sequential financing. In a model with moral hazard, social capital and endogenous group formation, we identify conditions such that sequential financing with joint liability leads to positive assortative matching between borrowers with and without social capital and, moreover, `bad' borrowers are partially screened out, thus resolving the moral hazard problem to some extent. Further, if the later loans are not too delayed, then under these conditions the expected payoff of the bank is greater compared to that under joint liability lending. Positive assortative matching or sequential financing (specially in the absence of joint liability) are no panacea though.

Suggested Citation

  • Prabal Roy Chowdhury, 2004. "Group-lending with sequential financing, joint liability and social capital," Discussion Papers 04-23, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:04-23
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    References listed on IDEAS

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    More about this item

    Keywords

    Group-lending; sequential financing; joint liability; social capital; assortative matching; endogenous group formation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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