Is Grameen Lending Efficient?
The Grameen Bank’s lending has two distinctive features: villagers are held jointly liable for repayments and are asked to make reports about each other. We consider a model where villagers have an information advantage over the bank and can collude. We derive an efficient Grameen type mechanism with cross reports. This mechanism induces villagers to help each other repay their loans without imposing large punishments for default. It yields the efficient outcome whether or not villagers can enforce side contracts. Mechanisms that do not use cross reports, such as individual or joint liability loans, are efficient when villagers can write complete state contingent side contracts, but not otherwise.
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