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Information to Users INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. A Bell & Howell Information Company 300 North Zeeb Road. Ann Arbor. Ml 48106-1346 USA 313/761-4700 800/521-0600 BORROWER BEHAVIOR AND LOAN REPAYMENT IN GROUP CREDIT DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Graduate School of the Ohio State University By Teodoro S. Untalan, B.S.,B.A.,M.A. * 4c * * * The Ohio State University 1996 Dissertation Committee: Approved by: Richard L Meyer Claudio Gonzalez-Vega Adviser ^ Cameron S. Thraen Department of Agricultural Economics and Rural Sociology UMI Number: 9620080 UMI Microform 9620080 Copyright 1996, by UMI Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. UMI 300 North Zeeb Road Ann Arbor, MI 48103 memory of my grandmother ACKNOWLEDGEMENTS Since this is a dissertation, it is just fitting for me to start by thanking my teachers. Professor Richard Meyer provided the opportunity for me to come to Ohio State and be part of Rural Finance group. As my adviser, I thank him for his patience in carefully reading the draft (quite a few times), pointing out the mistakes and weaknesses then suggesting alternative ways to discuss the material clearly. The dissertation has benefited a lot from my conversations with Professor Claudio Gonzalez-Vega. For one, his detailed comments served as a challenge. I also learned a lot from his insightful views during critical points of the draft Most of all, his encouragement helped me proceed with my work. I am fortunate to have taken some lessons in practical econometrics from Professor Cameron Thraen whom I owe for having introduced me to latent variable modeling. I thank him for having shared with me his interest in econometrics, particularly in structural equations modeling, that at one point during the course of this scholarly journey he was both my teacher and a classmate. iii I also liked to thank Professor Douglas Graham for his comments on an earlier draft. I have learned from a number of his suggestions. To the people who helped me with my data collection and encoding: my thanks goes to Elma and Cecil (my apologies for having forgotten their last names) for working double time to have the data ready, and to Cris Pacis of the Agricultural Credit Policy Council in Manila for facilitating the research team's access to the respondents during the fieldwork. I am of course grateful to my parents and my aunt Mila for their encouragement and prayers. Similarly, my thanks goes to my parents-in-law who, in the background, silently gave their support to what I was doing. The utmost gratitude goes to my wife Beth. Her unwavering faith in what I was doing gave me the discipline to proceed. During the course of my academic life she unfailingly lent her support and encouragement to all my endeavors and, most importantly, kept me organized. She deserves equal credit to this work. To her goes my thanks for the forbearance and support March 8, 1996. iv TABLE OF CONTENTS DEDICATION........................................................................................................... ii ACKNOWLEDGEMENTS........................................................................................... iii LIST OF TABLES.......................................................................................................... vii LIST OF FIGURES........................................................................................................ viii CHAPTER PAGE 1. INTRODUCTION........................................................................................ I 1.1. Informal Credit................................................................................. 2 1.2. The Research Agenda..................................................................... 9 1.3. Objectives and Organization of the Dissertation........................ II 2. GROUP CREDIT AND FINANCIAL MARKETS...................................... 14 2 .1. Lender Discrimination, Rationing, and Borrower Groups in Credit Markets......................................................................... 15 2.2. Group Credit as a Lending Arrangement................... 22 2.3. Group Credit: Experiences in Developing Countries 29 2.4. Group Credit: Evidence from the Philippines......................... 35 3. BORROWER BEHAVIOR IN GROUP CREDIT ARRANGEMENTS......................................................................................... 55 3.1. The Lender's Incentive Problem............................................... 57 3.2. The Optimal Choice of Actions by the Borrower................ 60 3.3. Payoff Incentive and Borrower Behavior A Dynamic Model 72 3.4. A Brief Chapter Summary........................................................... 77 v 4. AN EMPIRICAL INVESTIGATION OF LOAN REPAYMENTS IN GROUP CREDIT.................................................................................... 84 4.1. A Structural Equations Model Involving Latent Variables. 85 4.2. The Empirical Model ...................................................................... 88 4.3. The R esults ..................................................................................... 103 5. CONCLUSION .............................................................................................. 116 5.1. A Brief Summary and An Overview of the Results................ 120 5.2. Research Implications and Issues ................................................. 124 5.3. Some Policy Implications............................................................. 129 5.4. The Model's Limitation and Scope for Future Research 131 CHAPTER NOTES 3.1. A Derivation of the Dynamic Model for Borrowers in Groups......................................................................................... 78 3.2. Statement and Proof of Friedman’s Theorem............................ 80 3.3. An Example of a Game Involving Trigger Strategies 81 4 .1. The Covariance Matrix for Structural Equations with Latent Variables.............................................................................. 114 4.2. Descriptive Statistics: Dependent Variable............................... 115 LIST OF REFERENCES.................................................. ............................ 135 vi LIST O F TABLES TABLE PAGE 2 .1. Summary Information About the Three Sampled Philippine Group Credit Programs ................................................................................. 40 2.2. Borrower Characteristics By Program...................................................... 51 4.1. Covariance Structure Estimates: Loan Repayment M odel...................... 104 4.2. Covariance Structure Estimates: Total and Indirect Effects Between The Latent Variables...................................................................................... 107 4.3. Covariance Structure Estimates: Indicators for Familiarity.................... 109 4.4. Covariance Structure Estimates: Indicators for SES/Borrower Profile 112 vii LIST OF FIGURES FIGURE PAGE 2.1. The Lender's Supply Function......................................................................... 18 2.2. A Stratified Lending Structure....................................................................... 23 3.1. A Two-Player Payoff S p ace............................................................................. 64 3.2. A Two-Player Payoff Involving Trigger Strategies....................................... 82 4 .1. A Path Diagram for the Empirical M odel ..................................................... 97 viii CHAPTER I INTRODUCTION This dissertation is about group credit as a form of lending arrangement Its focus is on groups as one of the key participants in the credit relationship. The study endeavors to propose a framework which can explain the underlying group process resulting from such credit arrangements in an attempt to improve our understanding about the stability of groups. The relevant lessons to be learned may be useful to assess the effectiveness of groups in sustaining a credit relationship. A sustainable credit relationship is defined in terms of the group's ability to enforce loan contractual obligations which subsequently
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