Group lending with endogenous group size

Sylvain Bourjade*, Ibolya Schindele

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)556-560
Number of pages5
JournalEconomics Letters
Volume117
Issue number3
DOIs
StatePublished - 2012
Externally publishedYes

Keywords

  • Group lending
  • Moral hazard
  • Social capital

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