Electronic Resource
Berkeley, Calif.
:
Berkeley Electronic Press (now: De Gruyter)
Contributions to theoretical economics
2.2002, 1, art3
ISSN:
1534-5971
Source:
Berkeley Electronic Press Academic Journals
Topics:
Economics
Notes:
This paper studies an incentive rationale for the use of group lending as a method of financing liquidity-constrained entrepreneurs. The joint liability feature associated with group lending lowers the liquidity risk of default but creates a free-riding problem. In the static setting, the free-riding problem dominates the liquidity risk effect under a plausible condition, thus making group lending unattractive. When the projects are repeated infinitely many times, however, the joint liability feature provides the group members with a credible means of exercising peer sanction, which can make the group lending attractive, relative to individual lending.
Type of Medium:
Electronic Resource
URL:
http://www.bepress.com/bejte/contributions/vol2/iss1/art3
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