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Technology replaces culture in microcredit markets: the case of Italian MAGs

  • F. Calidoni-Lundberg
  • A. Fedele

    ()

We collect data from three Italian microcredit institutions which operate in urban areas by granting individual loans to two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations).Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza- Webb and we verify that repayment rate increases, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, extracts information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers are less likely to know each other and social sanctions are weak.

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File URL: http://swrwebeco.econ.unipr.it/RePEc/pdf/I_2006-11.pdf
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Paper provided by Department of Economics, Parma University (Italy) in its series Economics Department Working Papers with number 2006-EP11.

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Length: 19 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:par:dipeco:2006-ep11
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Web page: http://economia.unipr.it/de
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  1. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
  2. Laffont, Jean-Jacques & N'Guessan, Tchetche, 2000. "Group lending with adverse selection," European Economic Review, Elsevier, vol. 44(4-6), pages 773-784, May.
  3. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
  4. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  5. Alessandro Fedele, 2006. "Joint Liability Lending in Microcredit Markets with Adverse Selection: a Survey," Working Papers 20060901, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica, revised Sep 2006.
  6. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  7. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
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