| Abstract: |
We collect data from three Italian microcredit institutions which operate in
urban areas by granting individual loans to two categories of wealthless
borrowers: single entrepreneurs and organizations (cooperatives and
associations).Evidence shows that organizations repay with higher probability
and are charged a lower average interest rate than individuals. We use these
findings to construct a lending scheme which consists of granting loans
provided that borrowers form production teams (i.e. organizations). We
consider a microcredit market with adverse selection à la De Meza- Webb and we
verify that repayment rate increases, while interest rate falls with respect
to individual lending if the above scheme, which we refer to as production
team lending, is implemented. Our instrument, like joint liability implemented
in rural economies, extracts information from borrowers through a peer
selection mechanism but, differently from joint liability, fits to urban
contexts where borrowers are less likely to know each other and social
sanctions are weak. |