Group lending, local information and peer selection

This paper analyzes how group lending programs use joint liability to utilize localinformation that borrowers have about each other’s projects through self-selection of groupmembers in the group formation stage. These schemes are shown to lead to positiveassortative matching in group formation. Faced with the same contract, this makes theeffective cost of borrowing lower to safer borrowers: because they have safer partners,conditional on success their expected dues to the lender are lower than that of riskierborrowers. The resulting improvement in the pool of borrowers is shown to increaserepayment rates and welfare.[...]