Sequential Group Lending with Moral Hazard

In Grameen Bank's group lending arrangement, all agents within a group do not
borrow at the same time. Agents within a group, queue for credit and their
credit is conditional on successful repayments of the previous loans. In a group
lending model, where all group members borrow in the same time period with
joint liability contracts, if monitoring is costly and the effort is not observable
to other agents within the group, the agents are able to obtain higher rents with
the threat that they would collude not to monitor each other. These higher rents
limit this group lending arrangement’s ability to finance low productivity
projects. An increase in monitoring efficiency has virtually no effect on the
group lending arrangement’s ability to finance low productivity projects. The
paper suggests that within the group, if the agent's projects are financed
sequentially, the advantage is that the threat of collusion does not keep rents
high along with the disadvantage that expected output is lower. Therefore, we
find that between the two group lending arrangements, sequential group
lending allows the lender to finance a greater proportion of the socially viable
projects if the monitoring technology satisfies a certain efficiency condition.