Social Identity and Group Lending

Prabirendra Chatterjee and Sudipta Sarangi

No 405, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: The success of joint liability programs depends on nature and composition of borrowing groups. Group formation is a costly process and in our model these costs vary with the social identity of group partners. We show that risk heterogeneity in a borrowing group may arise due to the social identity of the agents. The presence of caste and gender bias may not resolve the adverse selection and moral hazard problems created by information asymmetry between the borrowers and the lender. We also find that with costly group formation and state verification, individual liability lending may be better than joint liability lending. Thus ignoring social identity and group formation costs can lead to the failure of a joint liability program. Finally, the paper also suggests that targeting different social groups requires the use of a menu of joint liability costs.

Keywords: Group lending; Risk heterogeneity; Formation costs; Social identity (search for similar items in EconPapers)
JEL-codes: D82 G20 N23 O12 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Social Identity and Group Lending (2004)
Working Paper: Social Identity and Group Lending
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