REPAYMENT INCENTIVES AND THE DISTRIBUTION OF GAINS FROM GROUP LENDING

Jean-Marie Baland, Rohini Somanathan and Zaki Wahhaj

No 192, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: Group loans with joint liability have been a distinguishing feature of many micro nance programs. While such lending has bene tted millions of borrowers, major lending insti- tutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are o ered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and nd that bank enforcement is more e ective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare e ects of group size and nd that those requiring small loans are better served by larger groups but group size e ects are, in general, ambiguous.

Keywords: microcredit; joint-liability; group lending; repayment incentives; social sanctions. (search for similar items in EconPapers)
JEL-codes: G21 I38 O12 O16 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-11
New Economics Papers: this item is included in nep-ban, nep-cis, nep-cta and nep-mfd
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Repayment incentives and the distribution of gains from group lending (2013)
Working Paper: Repayment incentives and the distribution of gains from group lending (2011)
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