Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection

Giovanni Busetta and Alberto Zazzaro ()

No 33, Mo.Fi.R. Working Papers from Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Abstract: In many countries, Mutual Loan-Guarantee Societies (MLGSs) are assuming ever-increasing importance for small business lending. In this paper we provide a theory to rationalise the raison d'^etre of MLGSs. The basic intuition is that the foundation for MLGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough collateralisable wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MLGSs as a wealth-pooling mechanism that allows otherwise inefficiently rationed borrowers to obtain credit. We focus on the case of large, complex urban economies where potential entrepreneurs are numerous and possess no more information about each other than do banks. Despite our extreme assumption on information availability, we show that MLGSs can be characterized by assortative matching in which only safe borrowers have an incentive to join the mutual society.

Keywords: Collateral; Group formation; Mutual Loan Guarantee Society; Small business lending (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Pages: 21
Date: 2009-11
New Economics Papers: this item is included in nep-cta, nep-ent, nep-mfd and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://docs.dises.univpm.it/web/quaderni/pdfmofir/Mofir033.pdf First version, 2009 (application/pdf)

Related works:
Journal Article: Mutual loan-guarantee societies in monopolistic credit markets with adverse selection (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wmofir:33

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