Cosigned vs. group loans

We analyze lending contracts when social sanctions are used to enforce repayments and borrowers differ in their abilities to impose sanctions. Symmetric group loans are preferred to cosigned loans when sanctioning abilities are similar; that is, when the power relation between borrowers is relatively equal. Conversely, cosigned loans are preferred when the power relation is unequal. We analyze why group lending arrangements offering different loan terms to members of the same group are difficult to implement. We also show that our comparison between symmetric group loans and cosigned loans is robust to endogenous matching. (c) 2006 Elsevier B.V. All rights reserved.