Joint Liability and Peer Monitoring under Group Lending

Yeon-Koo Che

The B.E. Journal of Theoretical Economics, 2002, vol. 2, issue 1, 28

Abstract: This paper studies an incentive rationale for the use of group lending as a method of financing liquidity-constrained entrepreneurs. The joint liability feature associated with group lending lowers the liquidity risk of default but creates a free-riding problem. In the static setting, the free-riding problem dominates the liquidity risk effect under a plausible condition, thus making group lending unattractive. When the projects are repeated infinitely many times, however, the joint liability feature provides the group members with a credible means of exercising peer sanction, which can make the group lending attractive, relative to individual lending.

Keywords: Group lending; free riding; and peer monitoring (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (30)

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DOI: 10.2202/1534-5971.1016

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