Cosigned Or Group Loans

Abstract

We analyze lending contracts when social sanctions are used to enforce repayments and borrowers differ in their unobserved sanctioning abilities. Symmetric group loans are preferred to cosigned loans when borrowers are relatively equal, and cosigned loans are preferred when borrowers are unequal. This explains why microlenders that target the poor (e.g., the Grameen Bank) use symmetric group loans while other untargeted lenders use cosigned loans. Complicated menus of loan contracts that induce borrowers to self select can do no better than these simple loan contracts unless borrowers are very productive. In particular, we explain why group lending arrangements offering different loan terms to members of the same group are seldom observed.Microcredit, Social Sanctions, Grameen Bank