Group Lending with Peer Selection and Moral Hazard

11 Pages Posted: 14 Jul 2017

See all articles by Li Gan

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Manuel A. Hernandez

International Food Policy Research Institute (IFPRI)

Yanyan Liu

International Food Policy Research Institute (IFPRI)

Date Written: July 7, 2017

Abstract

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

Gan, Li and Hernandez, Manuel A. and Liu, Yanyan, Group Lending with Peer Selection and Moral Hazard (July 7, 2017). Available at SSRN: https://ssrn.com/abstract=2998801 or http://dx.doi.org/10.2139/ssrn.2998801

Li Gan

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Manuel A. Hernandez

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Yanyan Liu (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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