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

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Abstract

This paper analyzes the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen ahead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are subject to moral hazard. In contrast to other analyses, the case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead relies 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-tasking game, where borrowers must be given incentives to be diligent as financed entrepreneurs and as monitors of others. Potential side contracting or collusion amongst borrowers is shown to only harm credit access, even when borrowers enjoy a monitoring advantage relative to outsiders.

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File URL: http://web.williams.edu/Economics/wp/jliability.pdf
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Bibliographic Info

Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2000-07.

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Length: 36 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:wil:wileco:2000-07

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Keywords: Joint-Liability; Group-Lending; Credit-Cooperatives; Financial-Intermediation;

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  1. Ashok S. Rai & Tomas Sjostrom, . "Is Grameen Lending Efficient?," CID Working Papers 40, Center for International Development at Harvard University.
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Cited by:
  1. Kramarz, Francis & Nordström Skans, Oskar, 2011. "When strong ties are strong Networks and youth labor market entry," Working Paper Series, Center for Labor Studies 2011:18, Uppsala University, Department of Economics.
  2. Hermes, Niels & Lensink, Robert & Teki, Habteab Mehrteab, 2003. "Peer monitoring, social ties and moral hazard in group lending programmes: evidence from Eritrea," Research Report 03E36, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  3. 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).
  4. Leonardo Becchetti & Fabio Pisani, 2010. "Microfinance, subsidies and local externalities," Small Business Economics, Springer, vol. 34(3), pages 309-321, April.
  5. Kundu, AMIT & MITRA, SURANJANA, 2009. "Determinants Influencing a Rural Household's Preference to Join Individual Liability or Joint Liability Micro Credit Contract Operated by Primary Aagricultural Credit Society," MPRA Paper 21784, University Library of Munich, Germany, revised 10 Oct 2009.
  6. Abdul Karim, Zulkefly, 2009. "Microfinance and Mechanism Design: The Role of Joint Liability and Cross-Reporting," MPRA Paper 23934, University Library of Munich, Germany, revised 12 Jan 2010.
  7. Li, Shanjun & Liu, Yanyan & Deininger, Klaus W., 2009. "How Important are Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49497, Agricultural and Applied Economics Association.
  8. Kumar Aniket, 2006. "Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending," ESE Discussion Papers 140, Edinburgh School of Economics, University of Edinburgh.

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