Group Lending Model Under Sequential Moves

This paper compares the simultaneous and sequential group lending mechanisms in terms of their ability to encourage borrowers’ monitoring and working efforts in a moral hazard environment with costly peer monitoring.

Group lending often involves active peer monitoring, which is expected to mitigate ex-ante moral hazard with respect to borrowers’ diligence or working effort. The borrowers may, however, collude on the decision to monitor by not monitoring at all, and hence, save costs of monitoring and obtain non-monitored private benefits.

Study results show that when credit is allocated to group members simultaneously, the borrowers make their decisions regarding monitoring and effort collectively. Findings indicate that:

• When credit is disbursed sequentially within the group, the borrower’s effort and monitoring decisions are temporally separated;
• Leader in sequential lending chooses higher working and monitoring effort levels, while the follower chooses lower working and monitoring effort levels;
• Repayment rate to the lender in the sequential lending model is higher than that in the simultaneous lending model.