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Assortative matching, adverse selection, and group lending

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  • Guttman, Joel M.

Abstract

This note reconsiders a theoretical result asserted to explain the success of group lending programs in LDCs. It has been claimed that if groups are allowed to form themselves, risky and safe borrowers will sort themselves into relatively homogenous groups. This "positive assortative matching" can be exploited by lenders to solve an adverse selection problem that would otherwise undermine the effectiveness of such lending programs. I show that the positive assortative matching result does not necessarily hold if earlier models are extended to incorporate dynamic incentives.

Suggested Citation

  • Guttman, Joel M., 2008. "Assortative matching, adverse selection, and group lending," Journal of Development Economics, Elsevier, vol. 87(1), pages 51-56, August.
    • Handle: RePEc:eee:deveco:v:87:y:2008:i:1:p:51-56
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    References listed on IDEAS

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    1. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-631, July.
    2. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    3. Laffont, Jean-Jacques & N'Guessan, Tchetche, 2000. "Group lending with adverse selection," European Economic Review, Elsevier, vol. 44(4-6), pages 773-784, May.
    4. Laffont, Jean-Jacques, 2003. "Collusion and group lending with adverse selection," Journal of Development Economics, Elsevier, vol. 70(2), pages 329-348, April.
    5. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    6. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    7. Joel M. Guttman, 2006. "Repayment Performance in Group Lending Programs: A Survey," NFI Working Papers 2006-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    8. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, vol. 60(1), pages 3-25, October.
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    Cited by:

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    2. Li Gan & Manuel A. Hernandez & Yanyan Liu, 2018. "Group Lending With Heterogeneous Types," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 895-913, April.
    3. Ahlin, Christian & Waters, Brian, 2016. "Dynamic microlending under adverse selection: Can it rival group lending?," Journal of Development Economics, Elsevier, vol. 121(C), pages 237-257.
    4. Guush Berhane & Cornelis Gardebroek & Henk A. J. Moll, 2009. "Risk‐matching behavior in microcredit group formation: evidence from northern Ethiopia," Agricultural Economics, International Association of Agricultural Economists, vol. 40(4), pages 409-419, July.
    5. Demont, Timothée, 2016. "Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages," European Economic Review, Elsevier, vol. 89(C), pages 21-41.
    6. Christian Ahlin, 2020. "Group lending, matching patterns, and the mystery of microcredit: Evidence from Thailand," Quantitative Economics, Econometric Society, vol. 11(2), pages 713-759, May.
    7. Altınok, Ahmet, 2023. "Group lending, sorting, and risk sharing," Games and Economic Behavior, Elsevier, vol. 140(C), pages 456-480.
    8. Meishan Jiang & Krishna P. Paudel & Seydina O. Sene, 2022. "Does counter‐guarantee affect microcredit mechanism's performance on repayment? Evidence from Guangzhou, China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1807-1817, April.
    9. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    10. Van Tassel Eric, 2017. "Structuring Subsidies in a Long-Term Credit Relationship," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(4), pages 1-12, October.
    11. Gashaw Tadesse Abate & Carlo Borzaga & Kindie Getnet, 2013. "Financial sustainability and outreach of microfinance institutions in Ethiopia: does organizational form matter?," Euricse Working Papers 1356, Euricse (European Research Institute on Cooperative and Social Enterprises).
    12. Hisaki KONO & Kazushi TAKAHASHI, 2010. "Microfinance Revolution: Its Effects, Innovations, And Challenges," The Developing Economies, Institute of Developing Economies, vol. 48(1), pages 15-73, March.
    13. Nahla Dhib & Arvind Ashta, 2020. "How far can we go? Determining the optimal loan size in progressive lending," Working Papers hal-03001840, HAL.
    14. Joel M. Guttman, 2010. "Reputation, Trust and the Logic of Group Lending," NFI Working Papers 2010-WP-02, Indiana State University, Scott College of Business, Networks Financial Institute.
    15. Yan Liu & Guang???Zhen Sun, 2008. "Competition And Access Regulation In The Telecommunications Industry With Multiple Networks," Monash Economics Working Papers 25/08, Monash University, Department of Economics.
    16. Fujimoto, Junichi & Lee, Junsang, 2020. "Optimal self-financing microfinance contracts when borrowers have risk aversion and limited commitment," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 60-79.
    17. Federica Calidoni & Alessandro Fedele, 2009. "Profit‐maximizing behaviour replaces social sanctions in urban microcredit markets The case of Italian MAGs1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 17(2), pages 329-349, April.
    18. Dyuti Banerjee & Anupama Sethi, 2008. "Intra-Group Transfers And Group Formation," Monash Economics Working Papers 24/08, Monash University, Department of Economics.

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