Group lending to a borrower network: a partial joint liability model

Usha Sridhar and Sridhar Mandyam

Journal of Network Theory in Finance

Abstract: ABSTRACTWe introduce a new group lending scheme that provides small loans against social collateral, with a primary focus on socially networked groups of prospective borrowers. We explore a quadratic mean-variance model to analyze the return and risk that a lender can expect given the default probabilities of the borrowers. A limited joint liability scheme with incentives is proposed in which the borrowers need to provide guarantees only to their immediate neighbors in the network.We highlight some features and establish the theoretical foundation of the model. The working of the model is demonstrated using synthetically generated network data.

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