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Collusion and Group Lending with Adverse Selection

Author

Listed:
  • Jean-Jacques Laffont

    (IDEI, ARQADE, GREMAQ, Université des Sciences Sociales de Toulouse)

Abstract

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.

Suggested Citation

  • Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d'Agliano, University of Milano.
    • Handle: RePEc:csl:devewp:147
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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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