Work detail

Group lending with peer monitoring: A theoretical model of microcredit

Author: Mgr. Martin Štrobl
Year: 2017 - summer
Leaders: prof. Ing. Karel Janda M.A., Dr., Ph.D.
Consultants:
Work type: Economic Theory
Masters
Language: English
Pages: 77
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/178704/
Abstract: Over the years, the lending procedures of microcredit has evolved. The original
joint liability group lending with simultaneous financing (loans released at once) has
been replaced by sequential financing (loans released one by one). Moreover, recent
studies suggest individual liability lending in groups to be the optimal choice. While
numerous theoretical studies provide thorough models of each of these approaches,
none presents a comparative analysis. In this study, we model these three schemes
using the framework by Van Tassel (1999) and compare them. Further, we add
exogenous peer monitoring costs and within-group heterogeneity of loan sizes to
our models. Our findings prove that, in the presence of information asymmetry,
group lending with joint liability dominates individual liability lending in groups.
Furthermore, the interest rate of the sequential model is more sensitive to changes of
monitoring costs or opportunity costs of capital than in the sequential model. On the
contrary, sequential approach allows for higher degree of within-group heterogeneity
of loan sizes. It is ambiguous which model achieves higher profit and lower interest
rate. Our results confirm that the choice of optimal financing approach is determined
by the characteristics of borrowers.

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