| This thesis examines the impacts of interventions in credit markets characterised by severe problems of asymmetric information. The first essay, “Group lending and borrower default: empirical evidence,” examines the relative effectiveness of competing lending methodologies. Group lending theory claims to mitigate problems of asymmetric information that lead to adverse selection, moral hazard, state verification and contract enforcement. This chapter, using data from a Toronto-based microcredit program, presents empirical evidence that group lending, while leading to assortative matching, does not lower default rates when compared to conventional individual lending.; The second essay, “Never do business with your friends: group lending, joint liability and dynamic incentives,” develops two simple theoretical models to explore the dynamic nature of joint liability contracts. From these models, I derive testable implications and then evaluate the predictions utilizing a unique panel data set. I find that dynamic incentives are an important feature of group lending programs. Interestingly, while joint liability is thought to improve repayment rates, in some cases, the incentives may be perverse. In groups with strong connections, the failure of one borrower may induce the failure of another borrower.; The third essay, “Financial constraints and investment: assessing the impact of a world bank credit program on small and medium enterprises in Sri Lanka,” examines the investment behavior of a sample of small, credit-constrained firms in Sri Lanka. Utilizing a unique panel data set, I analyze and compare the activities of two groups of small firms distinguished by their differential access to financing; one group consists of firms with heavily subsidized loans from the World Bank, while the other group consists of firms without such subsidies. I find that the World Bank Loan Subsidy Program led to higher levels of investment for financially constrained firms: however, the impact of the loan program on economic efficiency is inconclusive. The utilization of program evaluation techniques reveals that the relaxation of financing constraints did not affect economic efficiency for the group of firms that received subsidized capital. |
