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Group lending with endogenous group size

Bourjade, Sylvain; Schindele, Ibolya
Journal article, Peer reviewed
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URI
http://hdl.handle.net/11250/93766
Date
2012
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Original version
http://dx.doi.org/10.1016/j.econlet.2012.07.034
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 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
Description
This is the authors’ accepted and refereed manuscript to the article
Publisher
Elsevier
Journal
Economics Letters

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