TITLE:
The Role of Group Size and Correlated Project Outcomes in Group Lending
AUTHORS:
Marina Markheim
KEYWORDS:
Microfinance, Group Lending, Strategic Default, Group Size, Correlated Credit Risk
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.5,
July
21,
2017
ABSTRACT: This paper analyzes contract efficiency with regard
to correlated project realization and the size of the borrowers in group
lending. Firstly, I show that under the standard assumption of independent
project payoffs, the expected group cost of default decreases with group size.
Secondly, I show that small groups can also optimize group efficiency if
individual payoffs and credit risks are correlated. The results outline that
social cost minimization occurs due to a common interest in forming optimal
borrower groups between lenders and borrowers.