When Is the Optimal Lending Contract in Microfinance State Non-Contingent?

Doh-Shin Jeon and Domenico Menicucci

No 599, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: Whether a microfinance institution should use a state-contingent repayment or not is very important since a state-contingent loan can provide insurance for borrowers. However, the classic Grameen bank used state non-contingent repayment, which is puzzling since it forces poor borrowers to make their payments even under hard circumstances. This paper provides an explanation to this puzzle. We consider two modes of lending, group and individual lending, and for each mode we characterize the optimal lending and supervisory contracts when a staff member (a supervisor) can embezzle borrowers' repayments by misrepresenting realized returns. We identify the main trade-off between the insurance gain and the cost of controlling the supervisor's misbehavior. We also found that group lending dominates individual lending either by providing more insurance or by saving audit costs.

JEL-codes: D82 G20 O16 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-ban, nep-cta and nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: When is the optimal lending contract in microfinance state non-contingent? (2011)
Working Paper: When Is the Optimal Lending Contract in Microfinance State Non-Contingent? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:22425

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