Asymmetric group loans, non-assortative matching and adverse selection

This paper shows that an asymmetric group debt contract, where one borrower co-signs for another, but not vice versa, leads to heterogeneous matching. The analysis suggests that micro finance organizations can achieve the first best by offering asymmetric group contracts. •The paper examines asymmet...

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Bibliographic Details
Published in:Economics letters 2014-08, Vol.124 (2), p.185-187
Main Authors: Gangopadhyay, Shubhashis, Lensink, Robert
Format: Article
Language:English
Subjects:
Adverse selection
Asymmetry
Asymmetry of information
Borrowing
Cosigning
Credit rationing
Economic models
Economic theory
Economics and Business
Ekonomi och näringsliv
Financial services
Group lending
Joint liability
Micro finance
Microfinance
Risk management
Studies
Citations: Items that this one cites
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Summary:This paper shows that an asymmetric group debt contract, where one borrower co-signs for another, but not vice versa, leads to heterogeneous matching. The analysis suggests that micro finance organizations can achieve the first best by offering asymmetric group contracts. •The paper examines asymmetric group contracts.•The asymmetric contract leads to heterogeneous matching.•The risky co-sign safe loans.•The asymmetric group contract restores the first best full information outcome.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2014.05.010