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Joint Liability and Peer Monitoring under Group Lending
Contributions in Theoretical Economics (2002)
  • Yeon-Koo Che
This 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
Publication Date
Citation Information
Yeon-Koo Che. "Joint Liability and Peer Monitoring under Group Lending" Contributions in Theoretical Economics Vol. 2 Iss. 1 (2002)
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