Loan Allocation and Guarantee Structure for Group Borrower Networks in Microfinance

Abstract

In this article we consider the problem of allocating microcredit among a set of networked cooperating agents by a social planner. Network structure, risk aversion and risk sharing of the borrowers have been analyzed in the context of microfinance. We propose a partial liability model, where the borrowers need to take responsibility in case of defaults by their immediate connected neighbours, by committing guarantees as social collateral ex ante to the social planner. We have developed a utility-based allocation model that is Pareto optimal and maximizes a social welfare function. The methodology computes the guarantees and the allocations for the borrowers. We show that the allocation formula for arbitrarily connected networks captures the notion of dominance over neighbours which are one hop away. We also show how the synergy between connectivity, risk aversion and guarantees impacts allocation. We develop the properties of the rule and illustrate them with suitable examples.

DON and Shapley Value for Allocation among Cooperating Agents in a Network: Conditions for Equivalence

“…In this section, we shall summarize the DON model set-up and solution. More details are in the cited paper (Sridhar & Mandyam, 2016), where the methodology was placed in a microfinance context. We have restated the essential core of the formulation here in a more general network context so that the results may be conveniently compared with the FSV allocations.…”

“…The values of qi;∀i∈Nare such that ∑i∈Nqi=0, rendering Q rank deficient. See Sridhar and Mandyam (2016) for more details on flow interpretations and balance properties of Q .…”

“…In an article appearing recently in this journal (Sridhar & Mandyam, 2016), the authors explored a new method for the allocation of a divisible resource among a group of cooperating network-connected agents on the basis of a measure of connectedness. Cooperation among agents in this setting implied an agreement among the agents to share the available resource on the basis of a principle of common benefit that is acceptable to all the agents.…”