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Group lending with endogenous group size

Sylvain Bourjade and Ibolya Schindele

MPRA Paper from University Library of Munich, Germany

Abstract: This paper focuses on the size of the borrower group in group lending. We show that, when social ties in a community enhance borrowers' incentives to exert effort, a profit-maximizing financier chooses a group of limited size. Borrowers that would be fundable under moral hazard but have insufficient social ties do not receive funding. The result arises because there is a trade-off between raising profits through increased group size and providing incentives for borrowers with less social ties. The result may explain why many micro-lending institutions and rural credit cooperatives lend to groups of small size.

Keywords: Group Lending; Moral Hazard; Social Capital (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-cta, nep-mfd and nep-soc
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Journal Article: Group lending with endogenous group size (2012) Downloads
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