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Group lending and self-help groups: joint benefit as an alternative governance mechanism

Author

Listed:
  • Sukanta Bhattacharya
  • Sarmila Banerjee
  • Sirshendu Mukherjee

Abstract

Lending to the rural poor in developing economies, although crucial from the perspective of poverty management, is often subjected to severe informational problems. The literature on group lending with joint liability attempts to resolve these problems by making failure more costly for the borrowers. We take a different approach. In a model of lending with moral hazard, we show that rewarding group success by promising a joint benefit can be used as an alternative mechanism to solve informational problems. We also show that, unlike joint liabilitymechanism, this joint-benefit mechanism would ensure higher repayment probability even in the absence of peer-monitoring. Moreover, in this model, the optimal group size can be endogenously determined.

Suggested Citation

  • Sukanta Bhattacharya & Sarmila Banerjee & Sirshendu Mukherjee, 2008. "Group lending and self-help groups: joint benefit as an alternative governance mechanism," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(1), pages 1-19.
    • Handle: RePEc:taf:jitecd:v:17:y:2008:i:1:p:1-19
    DOI: 10.1080/09638190701727752
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    Cited by:

    1. Shagata Mukherjee & Michael Price, 2016. "Gender, Group and Moral Hazard in Microfinance: Evidence from Matrilineal and Patrilineal Societies in India," Framed Field Experiments 00554, The Field Experiments Website.
    2. Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.

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