Optimal Joint Liability Lending and With Costly Peer Monitoring

CentER Discussion Paper Series No. 2014-075

European Banking Center Discussion Paper Series No. 2014-013

30 Pages Posted: 4 Dec 2014

See all articles by Francesco Carli

Francesco Carli

CATÓLICA-LISBON School of Business & Economics

Burak Uras

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Date Written: December 2, 2014

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 micro finance programmes as an outcome of an optimal contract.

Keywords: Micro-finance, Joint-liability, Group leader

JEL Classification: G21, O12, 016

Suggested Citation

Carli, Francesco and Uras, Burak R., Optimal Joint Liability Lending and With Costly Peer Monitoring (December 2, 2014). CentER Discussion Paper Series No. 2014-075, European Banking Center Discussion Paper Series No. 2014-013, Available at SSRN: https://ssrn.com/abstract=2533401 or http://dx.doi.org/10.2139/ssrn.2533401

Francesco Carli (Contact Author)

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

Burak R. Uras

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
52
Abstract Views
889
rank
470,846
PlumX Metrics