Kartik Natarajan :
029_DP46 Can Group Lending Overcome Adverse Selection Problems?
JEL Classification:
D82; L14; O12
Abstract:
This paper looks at the group formation game in joint liability lending. We show that the formation of homogenous groups is possible even with asymmetric information between all parties. This is achieved through a signalling mechanism of non-monetary side payments. Homogeneous group formation has non-trivial welfare implications. Sufficient conditions for it to be welfare improving are discussed.
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