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Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard

I analyze the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen instead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are costly and subject to moral hazard. The case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-task game, where each borrower must be given incentives to remain diligent as a financed entrepreneur and as a monitor of others. The framework can be shown to encompass earlier analyses based on costless monitoring and also allows for relative performance evaluation.

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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 407.

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Length: 39 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:htr:hcecon:407
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  7. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
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  9. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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  11. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  12. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
  13. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  14. Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-26, Autumn.
  15. Gabriel Fuentes, 1996. "The use of village agents in rural credit delivery," Journal of Development Studies, Taylor & Francis Journals, vol. 33(2), pages 188-209.
  16. Jain, Pankaj S., 1996. "Managing credit for the rural poor: Lessons from the Grameen Bank," World Development, Elsevier, vol. 24(1), pages 79-89, January.
  17. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
  18. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  19. Che Yeon-Koo, 2002. "Joint Liability and Peer Monitoring under Group Lending," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-28, July.
  20. Varian, H.R., 1989. "Monitoring Agents With Other Agents," Papers 89-18, Michigan - Center for Research on Economic & Social Theory.
  21. Beatriz Armendariz de Aghion & Christian Gollier, 1996. "Peer Grouping in An Adverse Selection Model," Discussion Papers 96-24 ISSN 1350-6722, University College London, Department of Economics.
  22. Jonathan Morduch, 1998. "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh," Working Papers 198, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  23. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
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