Joint liability versus individual liability in credit contracts
AbstractI compare welfare generated by a credit contract with individual liability and a contract with joint liability. The problem is credit rationing caused by limited liability and unobservable investment decisions. Joint liability induces borrowers to monitor each other, however the lender can also monitor. I show that wealthier borrowers may prefer riskier investments when liability is joint, which causes the lender to offer them smaller loans than he would if liability were individual, even if he cannot monitor the individual-liability loan. Therefore, wealthier borrowers prefer individual-liability loans. The result may explain why small businesses grow larger when funded with individual rather than with joint-liability loans. Poorer borrowers may prefer joint-liability loans, because borrowers monitor more efficiently, even when their monitoring technology is the same as the lender, making joint-liability loans cheaper.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0304-18.
Length: 42 pages
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: 1022 International Affairs Building, 420 West 118th Street, New York, NY 10027
Phone: (212) 854-3680
Fax: (212) 854-8059
Web page: http://www.econ.columbia.edu/
More information through EDIRC
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Discussion Paper Coordinator).
If references are entirely missing, you can add them using this form.