Group Lending Model under Sequential Moves

Abstract

We build a simple dynamic model to investigate the sequential group lending's ability to resolve the ex-ante moral hazard and under-monitoring problems among group members in comparison with simultaneous group lending. We found that the interest rates proposed by the lender are critical to the analytical results. If the interest rate is under certain parameter conditions, both the leader member and the follower member in sequential lending choose higher working effort levels even with the presence of lower peer monitoring in the second period. In this case, the arrangement of sequential lending is beneficial for mitigating the ex-ante moral hazard and under-monitoring problems. If the interest rate is higher than a level with certain parameter configurations, the leader member chooses higher working and monitoring effort levels, whereas the follower member chooses lower working and monitoring effort levels. We also found that the repayment rate in the sequential lending model is higher than that in the simultaneous lending model.