Joint liability versus individual liability in credit contracts

Malgosia Madajewicz

Journal of Economic Behavior & Organization, 2011, vol. 77, issue 2, 107-123

Abstract: Abstract I offer an explanation for the coexistence of joint-liability and individual-liability microcredit contracts. I show that both contracts maximize welfare when credit is rationed due to limited liability, but for different borrowers. Borrowers monitor each other when liability is joint, while the lender monitors individual loans. Joint liability offers poorer borrowers larger loans with less monitoring effort than would have to be exerted by the lender. Individual liability offers the wealthier among credit-constrained borrowers larger loans even without monitoring. The theory explains why individual loans serve the wealthier among poor borrowers and are larger, and why businesses funded with individual loans grow more.

Keywords: Joint; liability; Peer; monitoring; Credit; rationing; Group; loans; Individual; loans (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:77:y:2011:i:2:p:107-123

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