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Joint Liability and Peer Monitoring under Group Lending
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Yeon-Koo Che
Published/Copyright:
July 3, 2002
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.
Published Online: 2002-07-03
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Local Conventions
- Equilibrium Departures from Common Knowledge in Games with Non-Additive Expected Utility
- Bargaining over Risky Assets
- Private Strategies in Finitely Repeated Games with Imperfect Public Monitoring
- Regulation by Negotiation: the Private Benefit Bias
- Joint Liability and Peer Monitoring under Group Lending
- The Noisy Duopolist
- Spontaneous Market Emergence
- A Simple Linear Programming Approach to Gain, Loss and Asset Pricing
- Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange
- Risk Averse Supervisors and the Efficiency of Collusion
- Advances Article
- The Principal-Agent Matching Market
