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Joint liability versus individual liability in credit contracts

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  • Madajewicz, Malgosia
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    Abstract

    Abstract I offer an explanation for the coexistence of joint-liability and individual-liability microcredit contracts. I show that both contracts maximize welfare when credit is rationed due to limited liability, but for different borrowers. Borrowers monitor each other when liability is joint, while the lender monitors individual loans. Joint liability offers poorer borrowers larger loans with less monitoring effort than would have to be exerted by the lender. Individual liability offers the wealthier among credit-constrained borrowers larger loans even without monitoring. The theory explains why individual loans serve the wealthier among poor borrowers and are larger, and why businesses funded with individual loans grow more.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 77 (2011)
    Issue (Month): 2 (February)
    Pages: 107-123

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    Handle: RePEc:eee:jeborg:v:77:y:2011:i:2:p:107-123

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    Web page: http://www.elsevier.com/locate/jebo

    Related research

    Keywords: Joint liability Peer monitoring Credit rationing Group loans Individual loans;

    References

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    1. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, Elsevier, vol. 60(2), pages 410-427, August.
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    6. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
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    13. Aleem, Irfan, 1990. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan," World Bank Economic Review, World Bank Group, World Bank Group, vol. 4(3), pages 329-49, September.
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    16. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
    17. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    18. Wydick, Bruce, 2001. "Group Lending under Dynamic Incentives as a Borrower Discipline Device," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 5(3), pages 406-20, October.
    19. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
    20. Jain, Sanjay & Mansuri, Ghazala, 2003. "A little at a time: the use of regularly scheduled repayments in microfinance programs," Journal of Development Economics, Elsevier, vol. 72(1), pages 253-279, October.
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    Cited by:
    1. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, vol. 107(C), pages 65-83.
    2. Attanasio, O. & Augsburg, B. & Haas, R. de & Fitzsimons, E. & Harmgart, H., 2013. "Group Lending or Individual Lending? Evidence from a Randomized Field Experiment in Rural Mongolia," Discussion Paper, Tilburg University, Center for Economic Research 2013-074, Tilburg University, Center for Economic Research.
    3. Maurizio Caserta & Francesco Reito, 2013. "Outreach and Mission Drift in Microfinance: An Interpretation of the New Trend," Economics Bulletin, AccessEcon, vol. 33(1), pages 167-178.

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