Joint Liability and Peer Monitoring under Group LendingContributions in Theoretical Economics (2002)
AbstractThis paper studies an incentive rationale for the use of group lending as a method of financing liquidity-constrained entrepreneurs. The joint liability feature associated with group lending lowers the liquidity risk of default but creates a free-riding problem. In the static setting, the free-riding problem dominates the liquidity risk effect under a plausible condition, thus making group lending unattractive. When the projects are repeated infinitely many times, however, the joint liability feature provides the group members with a credible means of exercising peer sanction, which can make the group lending attractive, relative to individual lending.
- Group lending,
- free riding,
- and peer monitoring
Citation InformationYeon-Koo Che. "Joint Liability and Peer Monitoring under Group Lending" Contributions in Theoretical Economics Vol. 2 Iss. 1 (2002)
Available at: http://works.bepress.com/yeonkoo/3/