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Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending

Saving opportunities can only be offered in group-lending by restricting the number of borrowers in a group, thus creating intra-group competition for loans. Our model predicts that this would lead to negative assortative matching along wealth lines (the wealthy would group with poorer individuals). We find that in a two member group, the borrower's wealth threshold for joining the group would be greater than the non-borrower's wealth threshold. The non-borrower's wealth threshold increases and the borrower's wealth threshold decreases with the cost of capital, thus widening the gap between the two thresholds. We thus highlight the two countervailing effects of subsidising the cost of capital, i.e., the trade-off between raising the wealth threshold for joining the group as a non-borrower and decreasing the expected time it would take to loosen the wealth deprived non-borrower's credit constraints.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 140.

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Length: 31
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:edn:esedps:140
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  1. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
  3. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  4. Jonathan Conning, 2000. "Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard," Department of Economics Working Papers 2000-07, Department of Economics, Williams College.
  5. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
  6. Kumar Aniket, 2003. "Sequential Group Lending with Moral Hazard," ESE Discussion Papers 136, Edinburgh School of Economics, University of Edinburgh.
  7. 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.
  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. 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.
  10. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  11. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
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