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Risk-Matching in Credit Groups: Evidence from Guatemala

  • Seth Carpenter

    (Federal Reserve Board)

  • Loic Sadoulet

    (Universite Libre de Bruxelles)

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    With widely publicized high repayment rates, microfinance is gaining a great deal of attention. Using data from Guatemala, this paper examines risk matching in credit groups. The literature often assumes that joint-liability will lead groups to form homogeneously in risk, and that risk heterogeneity emerges only as a second-best. We find they do not, even accounting for matching frictions. Data on mutual-help within groups provides evidence consistent with the hypothesis that group lending provides insurance among borrowers. This intra-group insurance suggests that current credit contracts can be improved by incorporating insurance provisions. We discuss one possibility of such a contract briefly.

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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1310.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1310
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    1. Udry, Christopher, 1990. "Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy," World Bank Economic Review, World Bank Group, vol. 4(3), pages 251-69, September.
    2. Daniel A. Ackerberg & Maristella Botticini, 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Boston University - Institute for Economic Development 92, Boston University, Institute for Economic Development.
    3. 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.
    4. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
    5. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
    6. Aleem, Irfan, 1990. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan," World Bank Economic Review, World Bank Group, vol. 4(3), pages 329-49, September.
    7. Huppi, Monika & Feder, Gershon, 1989. "The role of groups and credit cooperatives in rural lending," Policy Research Working Paper Series 284, The World Bank.
    8. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    9. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
    10. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
    11. Varian, H.R., 1989. "Monitoring Agents With Other Agents," Papers 89-18, Michigan - Center for Research on Economic & Social Theory.
    12. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
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