Thumbnail Image
Item

Joint-liability with endogenously asymmetric group loan contracts

Carli,Francesco
; 
Uras,Burak R.
Abstract
Group lending is a common practice that Microfinance Institutions (MFIs) utilize when lending to individuals without collateral. We develop a multi-agent principal-agent model with costly peer monitoring and solve for the optimal group loan contract. The optimal contract exhibits (i) a joint-liability scheme; and, (ii) asymmetric loan terms which can be interpreted as appointing a group leader, who has strong incentives to monitor her peer. Relaxing the joint-liability scheme implies the breakdown of equilibrium monitoring. When the contractual asymmetry is relaxed, the peer-monitoring game exhibits multiple Nash equilibria: a (weak) good equilibrium at which borrowers monitor each other and a (strong) bad equilibrium without monitoring. This key result suggests that profit maximizing MFIs should provide asymmetric group loan contracts - even to a homogeneous group of borrowers - to ensure stability in repayment rates.
Description
Date
2017-07
Journal Title
Journal ISSN
Volume Title
Publisher
Collections
Tilburg University Research Output Collection
Show all metadata
Files
Thumbnail Image
1_s2.0_S0304387817300263_main.pdf
Adobe PDF, 960.61 KB
Research Projects
Organizational Units
Journal Issue
Keywords
Microfinance, Joint-liability, Group leader, SDG 1 - No Poverty, SDG 8 - Decent Work and Economic Growth
Citation
Carli, F & Uras, B R 2017, 'Joint-liability with endogenously asymmetric group loan contracts', Journal of Development Economics, vol. 127, pp. 72-90. https://doi.org/10.1016/j.jdeveco.2017.03.003
URI
https://hdl.handle.net/20.500.14602/68417
License
info:eu-repo/semantics/openAccess
cb
Embedded videos