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Mutual Loan-Guarantee Societies in Credit Markets with Adverse Selection: Do They Act as a Sorting Device?

Author

Listed:
  • Giovanni BUSETTA

    () (Universit… di Napoli "Parthenope")

  • Alberto ZAZZARO

    () (Universita' Politecnica delle Marche, Dipartimento di Economia)

Abstract

Mutual Loan Guarantee Societies (MLGSs) are crucial players in credit markets of many European and non-European countries. In this paper we provide a theory to rationalize the raison d'e'tre of MLGSs. The basic intuition is that the foundation for MLGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough collateralizable wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MLGSs as a wealth pooling mechanism that allows otherwise inefficiently rationed borrowers to obtain credit. We focus on the case of large, complex urban economies where potential entrepreneurs are numerous and possess no more information about each other than do banks. Despite our extreme assumption on information availability, we show that MLGSs can be characterized by assortative matching in which only safe borrowers have an incentive to join the mutual society. In the last section, we show that the available evidence on the structure and performance of MLGSs active in Italy is consistent with some implications of our theory concerning their diffusion, the average number of their associates and the average default rate on guaranteed loans in developed and backward regions.

Suggested Citation

  • Giovanni BUSETTA & Alberto ZAZZARO, 2006. "Mutual Loan-Guarantee Societies in Credit Markets with Adverse Selection: Do They Act as a Sorting Device?," Working Papers 273, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  • Handle: RePEc:anc:wpaper:273
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    References listed on IDEAS

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    4. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
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    7. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 455-470.
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    Cited by:

    1. Ugo FRATESI, 2010. "The National and International Effects;of Regional Policy Choices: Agglomeration Economies, Peripherality and Territorial Characteristics," Working Papers 344, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    2. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    3. Luca RICCETTI, 2010. "Minimum Tracking Error Volatility," Working Papers 340, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    4. Petraglia, Carmelo & Amaturo, Francesca & Giordano, Luca, 2009. "Divari territoriali e limiti nell’accesso al credito per le PMI meridionali: quale ruolo per i Confidi?
      [Credit constraints for SMEs in the Italian Mezzogiorno: which role for Mutual Loan-Guarantee
      ," MPRA Paper 15210, University Library of Munich, Germany.
    5. Fabio FIORILLO & Agnese SACCHI, 2010. "I Want to Free-ride. An Opportunistic View on Decentralization Versus Centralization Problem," Working Papers 346, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    6. Busetta, Giovanni & Presbitero, Andrea F., 2008. "Confidi, Piccole Imprese E Banche: Un'Analisi Empirica
      [Mutual Loan-Guarantee Societies, Small Firms and Banks: An Empirical Investigation]
      ," MPRA Paper 7832, University Library of Munich, Germany.

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