Group lending under asymmetric information

This paper examines joint liability loan contracts as part of a screening mechanism adopted by lenders using group lending schemes. A model and one-period game are introduced in order to analyze the type of optimal loan contracts that emerge when lenders have less information than borrowers. It is s...

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Bibliographic Details
Published in:Journal of development economics 1999-10, Vol.60 (1), p.3-25
Main Author: Van Tassel, Eric
Format: Article
Language:English
Subjects:
Asymmetric information
Development economics
Economic models
Game theory
Group lending
Information
Joint liability
Lending institutions
Liability
Loans
Mathematical economics
Screening
Studies
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Summary:This paper examines joint liability loan contracts as part of a screening mechanism adopted by lenders using group lending schemes. A model and one-period game are introduced in order to analyze the type of optimal loan contracts that emerge when lenders have less information than borrowers. It is shown that under imperfect information, lenders may be able to utilize joint liability contracts as a means of screening agent types by inducing endogenous group formation and self-selection among the borrowers.
ISSN:0304-3878
1872-6089
DOI:10.1016/S0304-3878(99)00034-6