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

This paper analyzes the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen ahead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are subject to moral hazard. In contrast to other analyses, the case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead relies 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-tasking game, where borrowers must be given incentives to be diligent as financed entrepreneurs and as monitors of others. Potential side contracting or collusion amongst borrowers is shown to only harm credit access, even when borrowers enjoy a monitoring advantage relative to outsiders.

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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2000-07.

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Length: 36 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:wil:wileco:2000-07
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  1. Ashok S. Rai & Tomas Sjostrom, . "Is Grameen Lending Efficient?," CID Working Papers 40, Center for International Development at Harvard University.
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