Group-lending: Sequential financing, lender monitoring and joint liability

Prabal Roy Chowdhury ()
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Prabal Roy Chowdhury: Indian Statistical Institute, New Delhi

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: We develop a simple model of group-lendingbased on peer monitoring and moral hazard. We find that, in the absence of sequential financing or lender monitoring, group-lending schemes may involve under-monitoring with the borrowers investing in undesirable projects. Moreover, under certain parameter configurations, group-lending schemes involving either sequential financing, or a combination of lender monitoringand joint liability are feasible. In fact, group-lending schemes with sequential financing may succeed even in the absence of joint liability, though the repayment rate will be lower. In the absence of joint liability, however, group-lending with lender monitoring is unlikely to be feasible.

Keywords: Group-lending; joint liability; peer monitoring; sequential financing; under-monitoring; lender monitoring (search for similar items in EconPapers)
JEL-codes: G2 O2 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-12
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Citations: View citations in EconPapers (2)

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