Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect
Posted: 29 Aug 2000
We look at an economic environment where borrowers have some information about the nature of each other's projects that lenders do not. We show that joint-liability lending contracts, similar to those used by credit cooperatives and group-lending schemes, will induce endogenous peer selection in the formation of groups in a way that the instrument of joint liability can be used as a screening device to exploit this local information. This can improve welfare and repayment rates if standard screening instruments such as collateral are unavailable.
JEL Classification: D81, D82, G21
Suggested Citation: Suggested Citation