Moral Hazard and Repayment Performance Under Group Lending

This paper develops a model of the strategic interaction of borrowers in the framework of group lending, in an environment characterized by moral hazard. Unlike previous papers, monitoring by one group member of his or her peers is not a crucial feature of the model. Even without monitoring, repayment performance under group lending can compare favorably to such performance under individual liability. The effects of allowing monitoring and of changing group size are also investigated.