Mutual Loan-Guarantee Societies in Credit Markets with Adverse Selection: Do They Act as a Sorting Device?
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.
|Date of creation:||Nov 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Piazzale Martelli, 8, 60121 Ancona|
Phone: +39 071 220 7100
Fax: +39 071 220 7102
Web page: http://www.dises.univpm.it/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shubhashis Gangopadhyay & Maitreesh Ghatak & Robert Lensink, 2005. "Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 115(506), pages 1005-1015, October.
- Laffont, Jean-Jacques, 2000.
"Collusion and Group Lending with Adverse Selection,"
IDEI Working Papers
95, Institut d'Économie Industrielle (IDEI), Toulouse.
- Laffont, Jean-Jacques, 2003. "Collusion and group lending with adverse selection," Journal of Development Economics, Elsevier, vol. 70(2), pages 329-348, April.
- Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d'Agliano, University of Milano.
- Maitreesh Ghatak & Timothy W. Guinnane, 1998.
"The Economics of Lending with Joint Liability: Theory and Practice,"
98-16, University of Copenhagen. Department of Economics.
- Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
- Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
- Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Working Papers 791, Economic Growth Center, Yale University.
- David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
- Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
- N. Gregory Mankiw, 1986.
"The Allocation of Credit and Financial Collapse,"
NBER Working Papers
1786, National Bureau of Economic Research, Inc.
- 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.
- Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
- Maitreesh Ghatak & Raja Kali, 2001.
"Financially Interlinked Business Groups,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 10(4), pages 591-619, December.
- Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
- Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
When requesting a correction, please mention this item's handle: RePEc:anc:wpaper:273. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maurizio Mariotti)
If references are entirely missing, you can add them using this form.