A BEJTE Contributions article.

Abstract

This paper studies an incentive rationale for the use of group lending as a method of financing liquidity-constrained entrepreneurs. The joint liability feature associated with group lending lowers the liquidity risk of default but creates a free-riding problem. In the static setting, the free-riding problem dominates the liquidity risk effect under a plausible condition, thus making group lending unattractive. When the projects are repeated infinitely many times, however, the joint liability feature provides the group members with a credible means of exercising peer sanction, which can make the group lending attractive, relative to individual lending.

Submitted: December 8, 2000 · Accepted: June 21, 2001 · Published: July 3, 2002

Originally published in Contributions to Theoretical Economics.

Recommended Citation

Che, Yeon-Koo (2002) "Joint Liability and Peer Monitoring under Group Lending," Contributions to Theoretical Economics: Vol. 2 : Iss. 1, Article 3.
Available at: http://www.bepress.com/bejte/contributions/vol2/iss1/art3