Abstract: Helke Waelde (Department of Economics, Johannes Gutenberg Universitaet Mainz, Germany)
Abstract:
These days it has been witnessed, that banks other individual loans instead of group loans and develop products based on individual liability in developing countries. In order to study this surprising turn, we expand the conventional approach on decision making of individuals. A social prestige function is introduced that reflects the non-monetary impacts of group membership on the individual and on her decisions. If a borrower possesses more than a critical level of wealth, it is optimal for her to switch to individual borrowing. From a welfare perspective, a mixture of individual and group loans is desirable. However, the average borrower switches from group to individual lending too soon.
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