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Group Formation and Endogenous Information Collection in Microcredit

  • Sukanta BhattacharyaEmail author
  • Shirsendu Mukherjee
Chapter

Abstract

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.

Keywords

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

JEL Classification

G21 D82 O16 

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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

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