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Peer Grouping in An Adverse Selection Model

Author

Listed:
  • Beatriz Armendariz de Aghion

    (University College London)

  • Christian Gollier

    (GREMAQ AND IDEI)

Abstract

This paper develops an adverse selection model which uncovers two mechanisms whereby Grameen-style peer grouping systems can trigger lower interest rates. In one extreme scenario, where participant borrowers do not have prior information about the type of their peers, lower interest rate are triggered by a `collateral effect'. In the opposite scenario, where participant borrowers have perfect knowledge about their peers, lower interest rates are triggered by a `self selection' effect. Because of the latter effect, peer grouping can be viewed as a mechanism for banks to extract information from borrowers. The existence of the former effect implies, however, that information extraction by banks necessary for peer grouping systems to succeed in reducing interest rates, and that peer grouping systems are potentially implementable beyond the sphere of village economies with perfect information.

Suggested Citation

  • Beatriz Armendariz de Aghion & Christian Gollier, 1996. "Peer Grouping in An Adverse Selection Model," Discussion Papers 96-24 ISSN 1350-6722, University College London, Department of Economics.
    • Handle: RePEc:wuk:ucloec:9624
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    Citations

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    Cited by:

    1. 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.
    2. Jonathan Conning, 2005. "Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard," Economics Working Paper Archive at Hunter College 407, Hunter College Department of Economics.

    More about this item

    Keywords

    Credit; Peer-grouping; Adverse selection; Collateral; Selfselection;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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