Optimal Joint Liability Lending and with Costly Peer Monitoring

Francesco Carli, R.B. Uras

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Abstract

This paper characterizes an optimal group loan contract with costly peer monitoring. Using a fairly standard moral hazard framework, we show that the optimal group lending contract could exhibit a joint-liability scheme. However, optimality of joint-liability requires the involvement of a group leader, who heavily takes care of the partner's repayment share in bad states and gets compensated in expected terms. This key result holds even for a group of borrowers, which exhibits homogeneous characteristics in productivity, risk aversion and monitoring costs. Our work rationalizes the widely-applied group-leadership concept of microfinance programmes as an outcome of an optimal contract.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages30
Volume2014-075
Publication statusPublished - 2 Dec 2014

Publication series

NameCentER Discussion Paper
Volume2014-075

Keywords

  • Micro finance
  • Joint-liability
  • Group leader.

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    Carli, F., & Uras, R. B. (2014). Optimal Joint Liability Lending and with Costly Peer Monitoring. (CentER Discussion Paper; Vol. 2014-075). CentER, Center for Economic Research.