Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect

Posted: 29 Aug 2000

See all articles by Maitreesh Ghatak

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Abstract

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

Ghatak, Maitreesh, Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect. Available at SSRN: https://ssrn.com/abstract=236212

Maitreesh Ghatak (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

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HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

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