Group lending with endogenous group size

Sylvain Bourjade and Ibolya Schindele

Economics Letters, 2012, vol. 117, issue 3, 556-560

Abstract: This paper focuses on the size of the borrower group in group lending. We show that, when social ties in a community enhance borrowers’ incentives to exert effort, a profit-maximizing financier chooses a group of limited size. Borrowers that would be fundable under moral hazard but have insufficient social ties do not receive funding. The result arises because there is a trade-off between raising profits through increased group size and providing incentives for borrowers with less social ties. The result may explain why many micro-lending institutions and rural credit cooperatives lend to groups of small size.

Keywords: Group lending; Moral hazard; Social capital (search for similar items in EconPapers)
JEL-codes: D8 G2 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Working Paper: Group lending with endogenous group size (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:117:y:2012:i:3:p:556-560

DOI: 10.1016/j.econlet.2012.07.034

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