Abstract (may include machine translation)
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 effort, a profit-maximizing financier chooses a group of limited size. Borrowers that would be fundable under moral hazard but have insufficient social ties do not receive funding. The result arises because there is a trade-off between raising profits 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.
Original language | English |
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Pages (from-to) | 556-560 |
Number of pages | 5 |
Journal | Economics Letters |
Volume | 117 |
Issue number | 3 |
DOIs | |
State | Published - 2012 |
Externally published | Yes |
Keywords
- Group lending
- Moral hazard
- Social capital