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Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies

  • Ashok S. Rai
  • Tomas Sj–str–m

Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times. To analyse this, we study a mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross-reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank. Copyright The Review of Economic Studies Limited, 2004.

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Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): 1 (01)
Pages: 217-234

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Handle: RePEc:bla:restud:v:71:y:2004:i:1:p:217-234
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