Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129983
Authors: 
Baland, Jean-Marie
Somanathan, Rohini
Wahhaj, Zaki
Year of Publication: 
2014
Series/Report no.: 
School of Economics Discussion Papers 1415
Abstract: 
In recent years, microfinance institutions have expanded into group lending with individual liability, leaving out the joint liability clause which was an important feature in earlier lending contracts. Recent experimental evidence indicates that group lending may yield benefits, specifically lowering default rates, even in the absence of joint liability. In this paper, we develop a theoretical model where the public nature of group meetings means that borrowers have incentives to repay a group loan to safeguard their reputation. We show that the introduction of group loans with individual liability will cause sorting between joint liability and individual liability group loans. Specifically, borrowers who attach more importance to their reputation will select into individual liability loans, causing default rates and interest rates to rise for joint liability loans. The introduction of group loans with individual liability can even make joint liability loans infeasible in equilibrium.
Subjects: 
Microfinance
Group Lending
Joint Liability
Social Sanctions
Reputation
JEL: 
G21
O12
O16
D8
Document Type: 
Working Paper

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