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

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  • Ashok S. Rai
  • Tomas Sjöström

Abstract

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 2004, Wiley-Blackwell.

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  • Ashok S. Rai & Tomas Sjöström, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 217-234.
  • Handle: RePEc:oup:restud:v:71:y:2004:i:1:p:217-234
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