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Sequential Group Lending with Moral Hazard

Aniket, K; (2003) Sequential Group Lending with Moral Hazard. (ESE Discussion Papers 136). School of Economics, the University of Edinburgh: Edinburgh, UK. Green open access

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Abstract

In Grameen Bank's group lending arrangement, all agents within a group do not borrow at the same time. Agents within a group, queue for credit and their credit is conditional on successful repayments of the previous loans. In a group lending model, where all group members borrow in the same time period with joint liability contracts, if monitoring is costly and the effort is not observable to other agents within the group, the agents are able to obtain higher rents with the threat that they would collude not to monitor each other. These higher rents limit this group lending arrangement's ability to finance low productivity projects. An increase in monitoring efficiency has virtually no effect on the group lending arrangement's ability to finance low productivity projects. The paper suggests that within the group, if the agent's projects are financed sequentially, the advantage is that the threat of collusion does not keep rents high along with the disadvantage that expected output is lower. Therefore, we find that between the two group lending arrangements, sequential group lending allows the lender to finance a greater proportion of the socially viable projects if the monitoring technology satisfies a certain efficiency condition.

Type: Working / discussion paper
Title: Sequential Group Lending with Moral Hazard
Open access status: An open access version is available from UCL Discovery
DOI: 10.2139/ssrn.428387
Publisher version: https://www.ed.ac.uk/economics/research/discussion...
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Microfinance, Group-Lending, Credit
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
URI: https://discovery.ucl.ac.uk/id/eprint/10052421
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