Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard

Jonathan Conning

No 2000-07, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: This paper analyzes the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen ahead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are subject to moral hazard. In contrast to other analyses, the case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead relies on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-tasking game, where borrowers must be given incentives to be diligent as financed entrepreneurs and as monitors of others. Potential side contracting or collusion amongst borrowers is shown to only harm credit access, even when borrowers enjoy a monitoring advantage relative to outsiders.

Keywords: Joint-Liability; Group-Lending; Credit-Cooperatives; Financial-Intermediation (search for similar items in EconPapers)
JEL-codes: D82 G2 G24 O16 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2000-09
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