Group lending and the role of the group leader:Theory and evidence from Eritrea
Abstract: This paper investigates the strategic monitoring behaviour within a group lending setting. We develop a theoretical model, showing that monitoring efforts of group members differ from each other in equilibrium, as a result of the asymmetry between these members in terms of the future profits they generate with their project. In particular, we show that the entrepreneur with the project that generates the highest future profits also puts in the highest monitoring effort. Moreover, monitoring efforts differ between group members due to free-riding: one member reduces her level of monitoring if the other increases her monitoring effort. This effect is also at play when we introduce a group leader in the model. The individual who becomes the group leader will supply more monitoring effort than in the benchmark case, because of the reduced per unit monitoring costs related to becoming the leader. We empirically test the model using data from a survey of microfinance in Eritrea and show that the group leader attaches more weight to future periods than non-leaders in group lending and that this may explain why a large part of total monitoring is put in by the leader.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +31 50 363 7185
Fax: +31 50 363 3720
Web page: http://som.eldoc.ub.rug.nl/Email:
More information through EDIRC
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.:
- Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
- Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994.
"Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test,"
The Quarterly Journal of Economics,
MIT Press, vol. 109(2), pages 491-515, May.
- Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
- Prabal Roy Chowdhury, 2003.
"Group-lending: Sequential financing, lender monitoring and joint liability,"
Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers
04-10, Indian Statistical Institute, New Delhi, India.
- Chowdhury, Prabal Roy, 2005. "Group-lending: Sequential financing, lender monitoring and joint liability," Journal of Development Economics, Elsevier, vol. 77(2), pages 415-439, August.
- Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
When requesting a correction, please mention this item's handle: RePEc:dgr:rugsom:07004. 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: (Joke Bulthuis)
If references are entirely missing, you can add them using this form.