Group Lending with Heterogeneous Types

Li Gan; Manuel A. Hernandez; Yanyan Liu

doi:10.3386/w18847

Group Lending with Heterogeneous Types

Li Gan, Manuel A. Hernandez & Yanyan Liu

Working Paper 18847

DOI 10.3386/w18847

Issue Date February 2013

Group lending has been widely adopted in the past thirty years by many microfinance institutions as a means to mitigate information asymmetries when delivering credit to the poor. This paper proposes an empirical method to address the potential omitted variable problem resulting from unobserved group types when modeling the repayment behavior of group members. We estimate the model using a rich dataset from a group lending program in India. The estimation results support our model specification and show the advantages of relying on a type-varying method when analyzing the probability of default of group members.

We thank Alan de Brauw, Arun Chandrasekhar, Carlos Martins-Filho, Eduardo Nakasone, Annabel Vanroose, Ruth Vargas-Hill and seminar participants at the Winter Meetings of the Econometric Society and IFPRI for their helpful comments. We gratefully acknowledge financial support from the CGIAR Research Program on Policies, Institutions and Markets. We also thank the staff of the Center for Economics and Social Studies, particularly Prof. S. Galab, for their support and collaboration in making the data available. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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Group Lending with Heterogeneous Types

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