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Unformatted text preview: Morduch (1999) & Microﬁnance Literature Credit and Microﬁnance • Positive Assortative Matching: borrowers form groups with their
own type of borrowers
Adverse Selection: the problem of ascertaining the borrower’s risk type
◦ Attitudes towards interest-rate and joint-liability differs amongst
the types, which helps sort out the risky groups from the safe
• Risky type prefer low joint-liability high interest-rate and the
safe prefer high joint-liability low interest-rates
Moral Hazard Literature
◦ Lending to Wealthy Borrowers Make the borrower the residual claimant
of the project outcome and ﬁrst-best optimal contracts are offered
◦ Lending to Poor Borrowers Borrowers are left positive rents given that
they cannot be punished due to their lack of wealth, leading to a loss of
Group Lending: Moral Hazard
◦ Group Lending to Poor Borrowers Joint Liability contract reduce the
rents left to the borrower and thus increase the lending efﬁciency
• Costly Peer Monitoring Joint Liability contracts encourage borrowers to
peer monitor within group and thus increase the lending efﬁciency
Group Lending and Moral Hazard
Moral Hazard: Ensuring that the borrower exerts high effort.
◦ Joint liability encourages the borrowers to monitor the peer, which
increases lending efﬁciency, given that borrower’s monitoring
technology is superior the lender’s Development Economics, LSE Summer School 2007 112 ...
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This note was uploaded on 12/29/2011 for the course ECO 307 taught by Professor Dublin during the Spring '10 term at SUNY Stony Brook.
- Spring '10