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Is Grameen Lending Efficient?

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  • Ashok S. Rai
  • Tomas Sjostrom

Abstract

The Grameen Bank’s lending has two distinctive features: villagers are held jointly liable for repayments and are asked to make reports about each other. We consider a model where villagers have an information advantage over the bank and can collude. We derive an efficient Grameen type mechanism with cross reports. This mechanism induces villagers to help each other repay their loans without imposing large punishments for default. It yields the efficient outcome whether or not villagers can enforce side contracts. Mechanisms that do not use cross reports, such as individual or joint liability loans, are efficient when villagers can write complete state contingent side contracts, but not otherwise.

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Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 40.

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Handle: RePEc:wop:cidhav:40

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Keywords: Joint Liability; Collusion; Mechanism Design; Grameen Bank.;

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References

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  1. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  2. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
  3. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  4. Maskin, Eric & Sjostrom, Tomas, 2002. "Implementation theory," Handbook of Social Choice and Welfare, in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 5, pages 237-288 Elsevier.
  5. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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  13. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
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Cited by:
  1. Galarza, Francisco, 2003. "El crédito solidario, el colateral social, y la colusión. Algunos apuntes
    [Group Lending, Social Collateral and Collusion. Some Notes]
    ," MPRA Paper 30442, University Library of Munich, Germany.
  2. Jonathan Conning, 2000. "Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard," Department of Economics Working Papers 2000-07, Department of Economics, Williams College.
  3. Jonathan Conning, 2005. "Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard," Economics Working Paper Archive at Hunter College 407, Hunter College Department of Economics.

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