This paper studies group lending with joint-liability contracts offered by microfinance institutions (MFIs). I develop a model of group lending where heterogeneous agents form groups, obtain capital from the MFI, and share risks among themselves. I show that the composition of the groups is not always homogeneous once risk-sharing is introduced, ra- tionalizing the empirical evidence of risk heterogeneity within groups. Moreover, I find that joint liability introduces inefficiency for risk-averse borrowers, which explains why MFIs are moving away from joint-liability contracts. Surprisingly, the first best can be achieved even in the presence of information asymmetry.
|Publication status||In preparation - 2020|
- Group Lending
- Adverse Selection
- Joint Liability