A theory of progressive lending

Dyotona Dasgupta and Dilip Mookherjee

Games and Economic Behavior, 2023, vol. 137, issue C, 211-227

Abstract: We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment in a context where the borrower can accumulate wealth, has intertemporal consumption smoothing preferences, and the lender has some sanctioning power following default. We show the negative results of Bulow and Rogoff (1989) do not apply irrespective of the extent of sanctions, the borrower's preferences for smoothing, initial wealth or relative welfare weight. Borrowing, investment and wealth grow and converge to the first-best. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size.

Keywords: Dynamic contracts; Borrowing constraints; Moral hazard; Progressive lending; Microfinance (search for similar items in EconPapers)
JEL-codes: D86 G21 O16 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: A Theory of Progressive Lending (2020)
Working Paper: A Theory of Progressive Lending (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:137:y:2023:i:c:p:211-227

DOI: 10.1016/j.geb.2022.11.005

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