Group insurance and lending with endogenous social collateral

We construct a dynamic model of self-enforcing insurance provision and lending to a community of borrowers who are connected by risk-sharing arrangements that are themselves subject to enforcement problems, as in Kocherlakota (1996). We show that an outside lender offering constant-consumption contracts can earn a higher profit if he conditions his repeated interactions with each borrower on the history of his interactions with all the group members (a joint liability contract), rather than on his history with that borrower only (individual liability contracts). This result holds even in the absence of informational asymmetries. The observation driving it is that with individual liability contracts, a joint welfare-maximizing group may prefer to have one or more group members default on their contracts, so that the group can consume a mix of outside funds and the defaulters' stochastic income. One contribution of our work is to give precise economic content to the concept of “social collateral” as the per-agent surplus from group risk-sharing over autarky. The group can deter its members from defaulting on their contracts with the principal by threatening to reduce that surplus.     

Auctions for social lending: A theoretical analysis

Prosper, today the second largest social lending marketplace with nearly 1.5 million members and $380 million in funded loans, employed an auction mechanism amongst lenders to finance each borrower's loan until 2010. Given that a basic premise of social lending is cheap loans for borrowers, how does the Prosper auction do in terms of the borrower's payment, when lenders are strategic agents with private true interest rates? We first analyze the Prosper auction as a game of complete information and fully characterize its Nash equilibria, and show that the uniform-price Prosper mechanism, while simple, can lead to much larger payments for the borrower than the VCG mechanism. We next compare the Prosper mechanism against the borrower-optimal auction in an incomplete information setting, and conclude by examining the Prosper mechanism when modeled as a dynamic auction, and provide tight bounds on the price for a general class of bidding strategies.     

Collusion and group lending with adverse selection

In an environment with correlated returns, this paper characterizes optimal lending contracts when the bank faces adverse selection and borrowers have limited liability. Group lending contracts are shown to be dominated by revelation mechanisms which do not use the ex post observability of the partners' performances. However, when collusion between borrowers under complete information is allowed, group lending contracts are optimal in the class of simple revelation mechanisms (which elicit only the borrower's own private information) and remain useful with extended revelation mechanisms.     

Group Lending under Dynamic Incentives as a Borrower Discipline Device

In recent years group lending has become an increasingly utilized tool for providing credit access to the poor in developing countries. Using empirical results from first-hand field research on Guatemalan borrowing groups, this paper develops a simple game-theoretic model of group lending. Results from the model show that through peer monitoring, the threat of group expulsion, and the safety net of intragroup credit insurance, group lending mitigates some risky investment behavior that would otherwise occur under an individual borrowing contract. The credible threat of social sanctions against group members who misallocate borrowed capital further reduces instances of such behavior.     

Federal lending and aggregate economic activity

Attention to federal activity in credit markets is typically focused on the government's role as a borrower. In contrast, scant attention is paid to its equally large and dominant role as a lender. This paper evaluates the aggregate impact of federal lending activity within the framework of a vector autoregressive representation of the US macroeconomy. The empirical regularities uncovered suggest that aggregate federal lending activity does not have a net positive impact on output.     

The impact of public ownership in the lending sector

We examine the effects of increased government ownership of suppliers in the lending sector, which induces increased concern with total welfare and reduced concern with profit. Such increased ownership of a lender can have unanticipated effects. For instance, it can increase lender profit. Furthermore, borrower welfare often declines as government ownership increases in a lender with a relatively limited ability to discern the true quality of borrowers’ projects. In addition, there are settings in which increased government ownership of a lender has no impact on either lender profit or borrower welfare.     

On the Term Structure of Sovereign-Debt Contracts*

This paper studies the term structure of a repudiation-proof debt contract encompassing many sequentially scheduled short-term loans in a principal-agent (lender-sovereign borrower) framework. the extension of each loan is conditional on the full repayment of the previous loans in due maturity. Both direct sanctions and loss of access to the international credit market are present as debt-repudiation costs. It is shown that the proposed repudiation-proof composite contract exhibiting decreasing loan sizes and increasing maturities is better for coping with the enforcement problems that characterize sovereign lending.     

Is it better to be mixed in group lending?

This paper shows that, in a group‐lending scheme with joint liability, a microfinance institution can achieve a Pareto improvement by promoting negative assortative matching among borrowers. The main results are: (i) borrowers may be better off in heterogeneous groups; and (ii) a heterogeneous group equilibrium is possible when individual or homogeneous group equilibria do not exist.     

A decomposition approach to analysing racial and gender biases in Farm Service Agency's lending decisions

This study provides a different perspective in revisiting the racial and gender discrimination issue at the Farm Service Agency (FSA). Employing the Oaxaca–Blinder decomposition method, this study analyses disparities in approved loan amounts among racial and gender classes of borrowers. This study's results indicate substantial differentials in approved loan amount gaps between racial and gender classes, favouring white and female borrowers, respectively. Further scrutiny of the borrowers’ comparative financial conditions presented to FSA to support their loan applications, however, indicate that these borrower groups significantly dominate their peers in a number of measures that indicate their financial strengths and relatively greater capability to repay their future lending obligations. Hence, this study's results can hardly be construed as evidence of biased lending decisions as these borrower groups should rightfully be offered more favourable loan terms, such as larger loan amounts, by the FSA.     

Individual versus Village Lending: Evidence from Montenegro

This paper analyzes differences in loan performance across two Montenegrin microfinance institutions with different lending techniques using a sample of individuals borrowing from both institutions. We make use of administrative data from both institutions over the period 2004–2013. While one institution relies on village associations for screening and monitoring of borrowers, the other institution uses the individual liability approach. We find that the likelihood to go into arrears is higher for the institution with a strictly individual lending technique, while the likelihood of going into arrears over 30 days is higher for the institution working with village associations. These results are robust to a variety of additional tests, including different definitions of arrears and subsamples. Our findings suggest that the institution using an individual lending technique provides certain flexibility to its clients, while the village‐based microfinance institution might face more strategic default behavior. We provide evidence that once a borrower is in arrears, (s)he is more likely to stay in arrears for more than 30 days in branches with a higher share of borrowers in arrears and in the village‐based lender. Our findings provide evidence that a village‐ or group‐based lending technique is not necessarily superior to the individual lending technique in terms of loan performance.     

Social heterogeneity and local bias in peer-to-peer lending – evidence from China

This paper investigates the presence of local bias in the peer-to-peer (P2P) lending market and explores the social heterogeneous factors that may affect the formulation of the investor's local bias. We find that local biases are commonly present among investors. Investors have a 9.3% higher probability and put 105% more money in lending to local borrowers. We also find that overinvesting in local loans is correlated with higher default risk, lower recovery rate, and lower realized return, suggesting the underperformance of these locally biased investors. By taking advantage of the diverse local culture and institutional features in China, we further show that social heterogeneity, including geography, language, and social trust, affects the degree of local biases in the P2P lending market. We propose two debiasing techniques from the P2P platforms’ perspective.     

网络借贷中信息不对称缓解机制研究*——基于信号传递和双边声誉视角

本文借助于“人人贷”平台的微观数据从信号传递和双边声誉两个视角研究了网络借贷平台信息不对称问题的缓解机制。研究发现网络借贷平台的学历信号和双边声誉机制有助于减缓信息不对称程度，提高金融服务效率，增进资源的合理配置，降低融资后的道德风险。同时，本文还发现借款人的学历信号和双边声誉存在非对称的替代关系，高声誉更能弥补低学历借款人信誉信号的不足，因此低学历借款人更有激励建立自身的高声誉，但是随着借款人学历的提升，该非对称效应消失。进一步研究发现，学历信号和双边声誉机制在缓解借贷双方的信息不对称问题上存在较大的区域差异。本文的研究对于缓解“长尾人群”的融资约束提供了一种新的思路。     

A dynamic model of unsecured credit

We study the terms of credit in a competitive market in which sellers (lenders) are willing to repeatedly finance the purchases of buyers (borrowers) by engaging in a credit relationship. The key frictions are: (i) the lender cannot observe the borrower?s ability to repay a loan; (ii) the borrower cannot commit to any long-term contract; (iii) it is costly for the lender to contact a borrower and to walk away from a contract; and (iv) transactions within each credit relationship are not publicly observable. The lender?s optimal contract has two key properties: delayed settlement and debt forgiveness. Finally, we study the impact of changes in the initial cost of lending on the contract terms.     

CREDIT UNION MEMBER GROUP DOMINATION UNDER HIGH INTEREST RATE ENVIRONMENTS

Theoretical models for credit unions advocate that such organizations should pursue a neutral orientation in order to accommodate the conflicting interests of borrower members, who seek lower interest rates, and saver members, who look for higher returns on their savings. However, there is a lack of empirical support for such neutrality in high interest rate environments. This is because under such conditions, credit unions could accomplish their social mission by providing microcredit at a lower interest rate to local communities, thus becoming more borrower‐dominated. This paper investigates the member group domination of credit unions in Brazil, a country known for its high interest rates, and finds that the majority of credit unions (78.34%) are borrower‐dominated. This behavior becomes more pronounced when local interest rates rise, contradicting the predictions of neutrality‐seeking models. A percentage increase in the interest rate, increases about 5 times the likelihood of a CU becoming extreme borrower‐dominated. Besides interest rates, age, lower size, capital and lower efficiency of the credit unions are the main determinants of borrower domination.     

Two stages credit evaluation in bank loan appraisal

Traditionally, banks conduct standard credit evaluation such as credit scoring following the receipt of loan request and make the accept/reject decision accordingly. This research explores the possibility of two stages credit evaluation in lending process. When the evaluation cost drops below the trigger cost, it pays to conduct the second-stage loan appraisal. We derive two trigger cost thresholds for borrowers who are rated as credible and default in the first stage, respectively. Contingent on the share of good borrowers relative to the bad ones, the optimal strategy of the bank can be differentiated to implement second-stage evaluation on either (1) both types, or (2) only one type, or (3) neither type of the borrowers. We find that during severe economic contractions or in geographic areas/industries which are in deep troubles, whilst the borrowers who repay the loan are out-numbered by the borrowers who fail to pay, the trigger cost for good borrower is higher than that of default borrower. In this scenario, the banks are more inclined to undertake the second-stage credit evaluation on good borrowers. On the other hand, if the percentage of credible borrowers is higher than that of default borrowers, the trigger cost for good borrower lies below the trigger cost of default borrower. As a result, the banks are less inclined to undertake the second-stage evaluation on good borrowers.     

Optimal collective contract without peer information or peer monitoring

If entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature typically offers solutions based on the assumption of full peer information to solve adverse selection problems and peer monitoring to solve moral hazard problems. In contrast, I show that it is possible to construct a simple budget-balanced mechanism that implements the efficient outcome even if each borrower knows only own type and effort, and has neither privileged knowledge about others nor monitoring ability. The mechanism satisfies participation incentives for all types, and is immune to the Rothschild–Stiglitz cream skimming problem despite using transfers from better types to worse types. The presence of some local information implies that the mechanism cannot be successfully used by formal lenders. Thus a local credit institution can emerge as an optimal response to the informational environment even without peer information or monitoring. Finally, I investigate the role of monitoring in this setting and show how costly monitoring can increase the scope of the mechanism.     

Borrower runs

Microfinance institutions and other lenders in developing countries rely on the promise of future loans to induce repayment. However, if borrowers expect that others will default, and so loans will no longer be available in the future, then they will default as well. We refer to such contagion as a borrower run. The optimal lending contract must provide additional repayment incentives to counter this tendency to default.     

中国P2P不同模式的风险及监管对策分析

中国的P2P网络借贷模式多变,根据借贷过程中投资人的获取、借款人的获取、征信手段、是否存在担保等环节的不同,P2P网络借贷可以划分成线上中介平台、线下债权转让和线上线下相结合三种不同模式,每种模式各有特点,具有区别于其他模式的风险,应该全面准确梳理P2P网络借贷平台的运作模式、业务流程、风险因素,为其风险防控和更具针对性的监管提供理论依据。     

社会互动与投资选择

个体的投资选择是否受到社会互动的影响?社会互动的作用机制是什么?采用2005年中国12城市投资者行为调查数据,本文发现,总体而言,社会互动推动了个体当前和未来期望对银行存款、外汇、股票、债券、期货、基金、借出、做生意、保险金、收藏品、房地产、理财产品、彩票等投资项目的参与。社会互动的积极作用主要是通过个体遵循参考群体成员的投资选择所体现的社会规范来实现的。此外,内生互动带来的感受交流和信息获得分别推动了个体当前对保险金和未来期望对债券的投资,而情景互动降低了个体未来参与股市的期望。     

Credit Rationing, Group Lending and Optimal Group Size

I develop a model of credit rationing with effort unobservable by lenders where borrowers can choose among projects of different riskiness. In such a set-up rationing that can be relaxed if borrowers put up physical collateral arises. Group lending proves to be a possible means to relax rationing and improve efficiency when physical collateral is not available. The optimal size of groups is here analysed as a function of social factors. It turns out that groups can be neither too small nor too large because in both cases the effectiveness of social sanctions on behaviour is too low to offset the negative effect on effort due to profit sharing and free riding. Individual sensitivity to social sanctions is the crucial element determining whether groups can be formed or not.