Group lending under asymmetric information

This paper examines joint liability loan contracts as part of a screening mechanism adopted by lenders using group lending schemes. A model and one-period game are introduced in order to analyze the type of optimal loan contracts that emerge when lenders have less information than borrowers. It is shown that under imperfect information, lenders may be able to utilize joint liability contracts as a. means of screening agent types by inducing endogenous group formation and self-selection among the borrowers. (C) 1999 Elsevier Science B.V. All rights reserved.