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Social Identity and Group Lending

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  • Prabirendra Chatterjee
  • Sudipta, Sarangi

Abstract

The success of joint liability programs depends on nature and composition of borrowing groups. Group formation is a costly process and in our model these costs vary with the social identity of group partners. We show that risk heterogeneity in a borrowing group may arise due to the social identity of the agents. The presence of caste and gender bias may not resolve the adverse selection and moral hazard problems created by information asymmetry between the borrowers and the lender. We also find that with costly group formation and state verification, individual liability lending may be better than joint liability lending. Thus ignoring social identity and group formation costs can lead to the failure of a joint liability program. Finally, the paper also suggests that targeting different social groups requires the use of a menu of joint liability costs.

Suggested Citation

  • Prabirendra Chatterjee & Sudipta, Sarangi, "undated". "Social Identity and Group Lending," Working Papers UWEC-2005-06-R, University of Washington, Department of Economics.
  • Handle: RePEc:udb:wpaper:uwec-2005-06-r
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    File URL: http://students.washington.edu/prabir16/lending.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:ebl:ecbull:v:15:y:2005:i:9:p:1-8 is not listed on IDEAS
    2. Fernando Aguiar & Pablo Branas-Garza & Maria Paz Espinosa & Luis Miller, 2010. "Personal identity: a theoretical and experimental analysis," Journal of Economic Methodology, Taylor & Francis Journals, vol. 17(3), pages 261-275.
    3. Prabal Roy Chowdhury, 2006. "Group-lending with sequential financing, contingent renewal and social capital," Discussion Papers 06-01, Indian Statistical Institute, Delhi.
    4. Chowdhury, Prabal Roy, 2007. "Group-lending with sequential financing, contingent renewal and social capital," Journal of Development Economics, Elsevier, vol. 84(1), pages 487-506, September.
    5. Saxena, Vibhor & Bindal, Ishaan & LeMay-Boucher, Philippe, 2020. "Social groups and credit shocks: Evidence of inequalities in consumption smoothing," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 311-326.
    6. Vibhor Saxena & Ishaan Bindal & Philippe LeMay-Boucher, 2019. "Social groups and credit shocks: Evidence of inequalities in consumption smoothing," Discussion Paper Series, School of Economics and Finance 201901, School of Economics and Finance, University of St Andrews.
    7. Fernando Aguiar & Pablo Branas-Garza & Maria Paz Espinosa & Luis Miller, 2010. "Personal identity: a theoretical and experimental analysis," Journal of Economic Methodology, Taylor & Francis Journals, vol. 17(3), pages 261-275.
    8. Sudipta Sarangi & Prabirendra Chatterjee, 2005. "Enforcement with Costly Group Formation," Economics Bulletin, AccessEcon, vol. 15(9), pages 1-8.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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