Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect
Maitreesh Ghatak ()
Economic Journal, 2000, vol. 110, issue 465, 601-31
We look at an economic environment where borrowers have some information about the nature of each other's projects that lenders do not. We show that joint-liability lending contracts, similar to those used by credit cooperatives and group-lending schemes, will induce endogenous peer selection in the formation of groups in a way that the instrument of joint liability can be used as a screening device to exploit this local information. This can improve welfare and repayment rates if standard screening instruments such as collateral are unavailable.
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