Author(s)

Li Gan¹, Manuel A. Hernandez^2#, Yanyan Liu³

¹Department of Economics, Texas A & M University, College Station, TX, USA.
²International Food Policy Research Institute, Washington DC, USA.
³International Food Policy Research Institute and Dyson School of Applied Economics and Management, Cornell University, Ithaca, NY, USA.

The theory on group lending suggests that joint liability induces borrowers to form homogeneous groups based on their risk types, which alleviates adverse selection and contributes to the success of microcredit schemes. We extend this theory by allowing individuals to differ both in their exogenous risk type and in their endogenous effort level. We find that joint liability leads to positive assortative matching in both a non-cooperative and cooperative game setting. Groups of safe borrowers additionally exhibit higher effort levels, which reinforces their likelihood of repayment as opposed to risky groups.

Group Lending, Peer Selection, Moral Hazard, Microfinance

Gan, L. , Hernandez, M. and Liu, Y. (2022) Group Lending with Peer Selection and Moral Hazard. Theoretical Economics Letters, 12, 1351-1361. doi: 10.4236/tel.2022.125074.