Repayment incentives and the distribution of gains from group lending

Baland, Jean-Marie and Somanathan, Rohini and Wahhaj, Zaki (2013) Repayment incentives and the distribution of gains from group lending. Journal of Development Economics, 105 . pp. 131-139. ISSN 0304-3878. (doi:https://doi.org/10.1016/j.jdeveco.2013.07.008) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

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Official URL
http://doi.org/10.1016/j.jdeveco.2013.07.008

Abstract

Group loans with joint liability are a distinguishing feature of many microfinance programs. While such lending benefits millions of borrowers, major lending institutions acknowledge its limited impact among the very poor and have shifted towards individual loans. This paper attempts to explain this trend by exploring the relationship between borrower wealth and the benefits from group lending when access to credit is limited by strategic default. In our model, individuals of heterogeneous wealth face a given investment opportunity so poor investors demand larger loans. We show that the largest loan offered as an individual contract cannot be supported as a group loan. Joint liability cannot therefore extend credit outreach in the absence of additional social sanctions within groups. We also find that the benefits from group loans are increasing in borrower wealth and that optimal group size depends on project characteristics. By allowing for multi-person groups and wealth heterogeneity in the population, the paper extends the standard framework to analyze joint liability and contributes to an understanding of the conditions under which microcredit can reduce poverty.

Item Type: Article
Uncontrolled keywords: Microcredit; Joint-liability; Group lending; Repayment incentives; Social sanctions
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Zaki Wahhaj
Date Deposited: 14 May 2015 10:34 UTC
Last Modified: 15 May 2015 09:29 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/48409 (The current URI for this page, for reference purposes)
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