Assortative Matching, Adverse Selection,and Group Lending

Joel M. Guttman

No 2006-WP-07, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: This note reconsiders a theoretical result asserted to explain the success of group lending programs in LDCs. It has been claimed that if groups are allowed to form themselves, risky and safe borrowers will sort themselves into relatively homogenous groups. This 'positive assortative matching' can be exploited by lenders to solve an adverse selection problem that would otherwise undermine the effectiveness of such lending programs. This note shows that the positive assortative matching result does not necessarily hold if earlier models are extended to incorporate dynamic incentives.

Keywords: microfinance; microcredit; group lending; adverse selection; assortative matching (search for similar items in EconPapers)
Pages: 11 pages
Date: 2006-09
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