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Collusion and group lending with adverse selection

  • Laffont, Jean-Jacques

In an environment with correlated returns, this paper characterizes optimal lending contracts when the bank faces adverse selection and borrowers have limited liability. Group lending contracts are shown to be dominated by revelation mech- anisms which do not use the ex post observability of the partners\' performances. However, when collusion between borrowers under complete information is allowed, group lending contracts are optimal in the class of simple revelation mechanisms (which elicit only the borrower\'s own private information) and remain useful with extended revelation mechanisms.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 70 (2003)
Issue (Month): 2 (April)
Pages: 329-348

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Handle: RePEc:eee:deveco:v:70:y:2003:i:2:p:329-348
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  7. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
  8. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  9. Khandker, S.R. & Khalily, B. & Khan, Z., 1995. "Grameen Bank: Performance and Sustainability," World Bank - Discussion Papers 306, World Bank.
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  12. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
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