Group Lending and the Role of the Group Leader: Theory and Evidence from Eritrea

26 Pages Posted: 28 Feb 2007

See all articles by Niels Hermes

Niels Hermes

University of Groningen - Faculty of Economics and Business

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group

Remco van Eijkel

University of Groningen

Date Written: 2007

Abstract

This paper investigates the strategic monitoring behaviour within a group lending setting. We develop a theoretical model, showing that monitoring efforts of group members differ from each other in equilibrium, as a result of the asymmetry between these members in terms of the future profits they generate with their project. In particular, we show that the entrepreneur with the project that generates the highest future profits also puts in the highest monitoring effort. Moreover, monitoring efforts differ between group members due to free-riding: one member reduces her level of monitoring if the other increases her monitoring effort. This effect is also at play when we introduce a group leader in the model. The individual who becomes the group leader will supply more monitoring effort than in the benchmark case, because of the reduced per unit monitoring costs related to becoming the leader. We empirically test the model using data from a survey of microfinance in Eritrea and show that the group leader attaches more weight to future periods than non-leaders in group lending and that this may explain why a large part of total monitoring is put in by the leader.

Keywords: group lending, group leader, moral hazard, monitoring, Eritrea

JEL Classification: D82, G29, O16

Suggested Citation

Hermes, Niels and Lensink, Robert and van Eijkel, Remco, Group Lending and the Role of the Group Leader: Theory and Evidence from Eritrea (2007). Available at SSRN: https://ssrn.com/abstract=966116 or http://dx.doi.org/10.2139/ssrn.966116

Niels Hermes (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Wageningen UR - Development Economics Group ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

Remco Van Eijkel

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
171
Abstract Views
1,126
rank
209,511
PlumX Metrics