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Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard

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I analyze the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen instead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are costly and subject to moral hazard. The case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-task game, where each borrower must be given incentives to remain diligent as a financed entrepreneur and as a monitor of others. The framework can be shown to encompass earlier analyses based on costless monitoring and also allows for relative performance evaluation.

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File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP407.pdf
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Bibliographic Info

Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 407.

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Length: 39 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:htr:hcecon:407

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  1. Laffont, Jean-Jacques, 2000. "Collusion and Group Lending with Adverse Selection," IDEI Working Papers 95, Institut d'Économie Industrielle (IDEI), Toulouse.
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  11. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
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  13. Che Yeon-Koo, 2002. "Joint Liability and Peer Monitoring under Group Lending," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-28, July.
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  16. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  17. Varian, H.R., 1989. "Monitoring Agents With Other Agents," Papers 89-18, Michigan - Center for Research on Economic & Social Theory.
  18. Conning, Jonathan & Kevane, Michael, 2002. "Why isn't there more Financial Intermediation in Developing Countries?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  19. Beatriz Armendariz de Aghion & Christian Gollier, 1996. "Peer Grouping in An Adverse Selection Model," Discussion Papers 96-24 ISSN 1350-6722, University College London, Department of Economics.
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Cited by:
  1. Conning, Jonathan & Kevane, Michael, 2002. "Why isn't there more Financial Intermediation in Developing Countries?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Jaunaux, Laure, 2007. "Crédit individuel et informalité sont-ils compatibles ? Une expérience brésilienne," Economics Papers from University Paris Dauphine 123456789/13356, Paris Dauphine University.
  3. Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Working Papers 03-33, Bank of Canada.

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