File2-page115 - Morduch(1999& Microfinance Literature Credit and Microfinance • Positive Assortative Matching borrowers form groups with

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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 groups. • 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 lending efficiency 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.

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