Group Lending with Peer Selection and Moral Hazard
11 Pages Posted: 14 Jul 2017
Date Written: July 7, 2017
This paper extends Ghatak (1999)'s base model of group lending with asymmetric information by allowing individuals to differ both in their exogenous risk type and in their endogenous effort level. We find that joint liability leads to positive assortative matching in both a non-cooperative and a cooperative game setting. Groups of safe borrowers also exhibit higher effort levels, which further reinforces their likelihood of repayment as opposed to risky groups.
Keywords: Group lending, peer selection, moral hazard
JEL Classification: O16, D82, G20
Suggested Citation: Suggested Citation