Social Identity and Group Lending

UW Economics Working Paper No. UWEC-2005-06-R

Posted: 6 May 2005

See all articles by Prabirendra Chatterjee

Prabirendra Chatterjee

University of Washington - Department of Economics

Sudipta Sarangi

Virginia Polytechnic Institute & State University

Date Written: January 2004

Abstract

The success of joint liability programs depends on nature and composition of borrowing groups. Group formation is a costly process and in our model these costs vary with the social identity of group partners. We show that risk heterogeneity in a borrowing group may arise due to the social identity of the agents. The presence of caste and gender bias may not resolve the adverse selection and moral hazard problems created by information asymmetry between the borrowers and the lender. We also find that with costly group formation and state verification, individual liability lending may be better than joint liability lending. Thus ignoring social identity and group formation costs can lead to the failure of a joint liability program. Finally, the paper also suggests that targeting different social groups requires the use of a menu of joint liability costs.

Keywords: Group Lending, Risk Heterogeneity, Formation Costs

JEL Classification: D82, G20, N23, O12

Suggested Citation

Chatterjee, Prabirendra and Sarangi, Sudipta, Social Identity and Group Lending (January 2004). UW Economics Working Paper No. UWEC-2005-06-R, Available at SSRN: https://ssrn.com/abstract=716503

Prabirendra Chatterjee (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

HOME PAGE: http://students.washington.edu/prabir16/

Sudipta Sarangi

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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