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The Network Basket Loan: A Collective Lending Instrument to Correct Partial Selection Market Failure
This paper introduces the Network Basket Loan, a collective lending mechanism enabling
profit and non-profit organizations to jointly access concessional credit and public incentives within
a network contract, conditional on a positive aggregate social impact and joint liability. The
instrument addresses a distinct market failure, termed partial selection, which arises when projects
are assessed individually rather than as components of a system, leading to the exclusion of
combinations of agents that would increase aggregate welfare. A theoretical model shows that the
NBL enhances welfare through three channels: (i) risk sharing from joint liability, which lowers
borrowing costs; (ii) network synergies that raise returns through cooperation; and (iii) internal
transfers that extend credit to economically weaker yet socially valuable members. The model defines
the conditions under which Network Basket Loan increases welfare and demonstrates their
superiority to existing instruments, such as Social Basket Loans, in overcoming partial selection
market failure.
Lorenzo Semplici
Leonardo Becchetti, Demetrio M. Bova, Luca Raffaele, Dilara Araas
Year of publication 2025