Theoretical Economics Letters

Volume 7, Issue 5 (August 2017)

ISSN Print: 2162-2078   ISSN Online: 2162-2086

Google-based Impact Factor: 0.82  Citations  

The Role of Group Size and Correlated Project Outcomes in Group Lending

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DOI: 10.4236/tel.2017.75080    870 Downloads   1,733 Views  Citations
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ABSTRACT

This paper analyzes contract efficiency with regard to correlated project realization and the size of the borrowers in group lending. Firstly, I show that under the standard assumption of independent project payoffs, the expected group cost of default decreases with group size. Secondly, I show that small groups can also optimize group efficiency if individual payoffs and credit risks are correlated. The results outline that social cost minimization occurs due to a common interest in forming optimal borrower groups between lenders and borrowers.

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Markheim, M. (2017) The Role of Group Size and Correlated Project Outcomes in Group Lending. Theoretical Economics Letters, 7, 1189-1200. doi: 10.4236/tel.2017.75080.

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