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Repayment incentives and the distribution of gains from group lending

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  • Baland, Jean-Marie
  • Somanathan, Rohini
  • Wahhaj, Zaki

Abstract

Group loans with joint liability have been a distinguishing feature of many microfinance programs. While such lending has benefitted millions of borrowers, major lending institutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are offered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and find that bank enforcement is more effective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare effects of group size and find that those requiring small loans are better served by larger groups but group size effects are, in general, ambiguous.

Suggested Citation

  • Baland, Jean-Marie & Somanathan, Rohini & Wahhaj, Zaki, 2011. "Repayment incentives and the distribution of gains from group lending," CEPR Discussion Papers 8197, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8197
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    References listed on IDEAS

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    10. repec:pri:rpdevs:morduch_microfinance_poor is not listed on IDEAS
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    Citations

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    Cited by:

    1. Jean-Marie Baland & Rohini Somanathan & Lore Vandewalle, 2011. "Socially Disadvantaged Groups and Microfinance in India," Working Papers 1117, University of Namur, Department of Economics.
    2. P Simmons (York) & N Tantisantiwong (Southampton), 2014. "Default and Risk Premia in Microfinance Group Lending," Discussion Papers 14/28, Department of Economics, University of York.
    3. Fetzer, Thiemo, 2016. "Commercialization and the Decline of Joint Liability Microcredit," The Warwick Economics Research Paper Series (TWERPS) 1119, University of Warwick, Department of Economics.
    4. 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.
    5. Baland, Jean-Marie & Gangadharan, Lata & Maitra, Pushkar & Somanathan, Rohini, 2017. "Repayment and exclusion in a microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 176-190.
    6. Janssens, Wendy & Kramer, Berber, 2016. "The social dilemma of microinsurance: Free-riding in a framed field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 47-61.
    7. Bulte, Erwin & Wang, Ruixin & Zhang, Xiaobo, 2017. "Forced gifts: The burden of being a friend," IFPRI discussion papers 1615, International Food Policy Research Institute (IFPRI).
    8. Peter Simmons & Nongnuch Tantisantiwong, 2018. "Evaluation of Individual and Group Lending under Asymmetric information," Discussion Papers 18/01, Department of Economics, University of York.
    9. repec:cep:stieop:44 is not listed on IDEAS
    10. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    11. Jean-Marie Baland & Rohini Somanathan & Zaki Wahhaj, 2014. "Group Lending and Endogenous Social Sanctions," Studies in Economics 1415, School of Economics, University of Kent.
    12. Ahlin, Christian, 2015. "The role of group size in group lending," Journal of Development Economics, Elsevier, vol. 115(C), pages 140-155.
    13. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2016. "Group lending without joint liability," Journal of Development Economics, Elsevier, vol. 121(C), pages 217-236.

    More about this item

    Keywords

    group lending; joint-liability; microcredit; repayment incentives; social sanctions.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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