Group Formation and Endogenous Information Collection in Microcredit

  • Sukanta BhattacharyaEmail author
  • Shirsendu Mukherjee


This paper attempts to address the effects of different types of loan contract on a borrower’s incentive for investment in information. We model the trade-off that a borrower faces when she collects information about the potential of her intended projects both under individual and joint liability loan contracts. Even under limited liability, the borrower faces a trade-off at information collection stage between the cost of signal collection, and the cost of her time and effort for project execution in case the project fails. We show that joint liability contract induces borrowers to invest more in information than individual liability for low rates of interest. However, for some high rates of interest, borrowers invest positive amount in information collection under individual liability, but do not take up the project under joint liability.


Joint liability Group lending Moral hazard Peer monitoring Group size Social sanction 

JEL Classification

G21 D82 O16 


  1. Besley, T., & Coate, S. (1995). Group lending, repayment incentives and social collateral. Journal of Development Economics, 46, 1–18.CrossRefGoogle Scholar
  2. Bhattacharya, S., Banerjee, S., & Mukherjee, S. (2008, March). Group lending and self help groups: Joint benefit as an alternative governance mechanism. The Journal of International Trade and Development, 17(1).Google Scholar
  3. Chowdhury, S., Roy Chowdhury P., & Sengupta, K. (2014). Sequential lending with dynamic joint liability in micro-finance, Discussion Papers in Economics, Discussion Paper 14-07. Indian Statistical Institute, Delhi, India.Google Scholar
  4. Conning, J. (1999). Outreach, sustainability and leverage in monitored and peer-monitored lending. Journal of Development Economics, 60, 51–77.CrossRefGoogle Scholar
  5. de Aghion, B. A. (1999). On the design of a credit agreement with peer monitoring. Journal of Development Economics, 60, 79–104.CrossRefGoogle Scholar
  6. Ghatak, M. (1999). Group lending, local information and peer selection. Journal of Development Economics, 60, 27–50.CrossRefGoogle Scholar
  7. Ghatak, M., & Guinnane, T. W. (1999). The economics of lending with joint liability: Theory and practice. Journal of Development Economics, 60, 195–228.CrossRefGoogle Scholar
  8. Ghosh, P., & Ray, D. (1997). Information and repeated interaction: Application to informal credit markets. Draft: Texas A & M and Boston University.Google Scholar
  9. Janvry, A., McIntosh, C., & Sadoulet, E. (2010). The supply and demand side impacts of credit market information. Journal of Development Economics, 93(2), 173–188.Google Scholar
  10. Morduch, J., & de Aghion, B. A. (2004a). Microfinance: Where do we stand. In C. Goodhart (Ed.), Financial development & economic growth: Explaining the links. London: Palgrave McMillan.Google Scholar
  11. Morduch, J., & de Aghion, B. A. (2004b). Microfinance beyond group lending. The Economics of Transition, 8, 401–420.Google Scholar
  12. Mukherjee, S., & Bhattacharya, S. (2014). Optimal joint liability and group size in microcredit. Arthaniti-Journal of Economic Theory and Practice, 13(1–2), (19–47).Google Scholar
  13. Mukherjee, S., & Bhattacharya, S. (2015). Optimal group size under group lending with joint liability and social sanction. Indian Growth and Development Review, 8(1).Google Scholar
  14. Roy Chowdhury, P. (2005). Group lending: Sequential financing, lender monitoring and joint liability. Journal of Development Economics, 77, 415–439.CrossRefGoogle Scholar
  15. Roy Chowdhury, P. (2007). Group-lending with sequential financing, contingent renewal and social capital. Journal of Development Economics, 84, 487–507.CrossRefGoogle Scholar
  16. Sinha, F. (2005, April 23). Access, use and contribution of microfinance in India: Findings from a national study. Economic and Political Weekly, XL(17).Google Scholar
  17. Stiglitz, J. E. (1990). Peer monitoring and credit markets. The World Bank Economic Review, 4, 351–366.CrossRefGoogle Scholar
  18. Tsukada, K. (2012). Microfinance revisited: Towards a more flexible lending contracts. In A. Shonchoy (Ed.), Seasonality adjusted flexible micro-credit: An randomized experiment in Bangladesh, Interim Report. Chosakenkeu Hokokusho, IDE-JETRO 2012.Google Scholar
  19. Van Tassel, E. (1999). Group lending under asymmetric information. Journal of Development Economics, 60, 3–25.CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of CalcuttaKolkataIndia
  2. 2.Department of EconomicsSt. Paul’s C. M. CollegeKolkataIndia

Personalised recommendations