Group lending with endogenous group size
Journal article, Peer reviewed
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Date
2012Metadata
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Original version
10.1016/j.econlet.2012.07.034Abstract
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 e¤ort, a pro t-maximizing nancier chooses a group of limited size. Borrowers that would be fundable under moral hazard but have insu¢ cient social ties do not receive funding. The result arises because there is a trade-o¤ between raising pro ts 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
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This is the authors’ accepted and refereed manuscript to the article