Group lending, local information and peer selection

This paper analyzes how group lending programs use joint liability to utili ze local information that borrowers have about each other's projects throug h self-selection of group members in the group formation stage. These schem es are shown to lead to positive assortative matching in group formation. F aced with the same contract, this makes the effective cost of borrowing low er to safer borrowers: because they have safer partners, conditional on suc cess their expected dues to the lender are lower than that of riskier borro wers. The resulting improvement in the pool of borrowers is shown to increa se repayment rates and welfare. (C) 1999 Elsevier Science B.V. All rights r eserved.