Template-Type: ReDIF-Paper 1.0

Author-Name: Lutz Arnold
Author-X-Name-First: Lutz
Author-X-Name-Last: Arnold

Author-Name: Johannes Reeder
Author-X-Name-First: Johannes
Author-X-Name-Last: Reeder

Author-Name: Susanne Steger
Author-X-Name-First: Susanne
Author-X-Name-Last: Steger


Title: Microfinance and markets: New results for the Besley-Coate group lending model
	
Abstract: Microfinance currently experiences a huge inflow of private investors and a surge in the use
of market instruments. This raises the question of what market equilibria in microfinance
markets look like and which kinds of market failure tend to afflict them. The present paper
conducts an equilibrium analysis of Besley and Coate’s (1995) group lending model with
enforcement problems.We show that a consideration of repayment rates alone is not sufficient
to predict market outcomes, as it is biased towards group lending. Market equilibria are likely
to exhibit the same kinds of market failure as equilibria in adverse selection models, viz.,
financial fragility, redlining, and credit rationing. Social sanctions ameliorate these problems,
but do not eliminate them.
Length:  39 pages
Creation-Date:  2009-01
File-URL: http://www.bgpe.de/texte/DP/067_reeder.pdf
File-Format: Application/pdf
File-Function: First version, 2008
Number: 067
Classification-JEL: G21
Keywords: microfinance, group lending, enforcement
Handle: RePEc:bav:wpaper:067_reeder