On the design of a credit agreement with peer monitoring

Aghion, Beatriz Armendáriz de

doi:10.1016/s0304-3878(99)00037-1

Cited by 207 publications

(68 citation statements)

References 8 publications

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“…3 On the other hand, if social sanctions are sufficiently strong, group lending can improve repayment rates by encouraging borrowers to help each other. Similarly, Armendariz de Aghion (1999) in her model with costly peer monitoring and social sanctions finds that if peer monitoring is not very costly and social Journal of Development Economics 91 (2010) [348][349][350][351][352][353][354][355][356][357][358][359][360][361][362][363] sanctions are sufficiently large then the bank's profit is higher with group lending; otherwise, individual lending does better. 4 These papers suggest that a bank whose clients are unable to impose strong social sanctions on one another may be better off choosing individual liability over joint liability, at least when dealing with the problem of strategic default.…”

Section: Introductionmentioning

confidence: 98%

Group lending and individual lending with strategic default

Bhole

Ogden

2010

Journal of Development Economics

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Section: Introductionmentioning

confidence: 98%

Group lending and individual lending with strategic default

Bhole

Ogden

2010

Journal of Development Economics

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“…Some of these models explicitly focus on the properties of joint liability lending related to mitigating information asymmetries. For example, models by Stiglitz (1990) and Varian (1990), Banerjee et al (1994), Armendáriz de Aghion (1999), and Chowdhury (2005) explicitly deal with moral hazard and monitoring problems, showing how joint liability may help to solve these problems. Ghatak (1999Ghatak ( , 2000 and Gangopadhyay et al (2005), among others, provide models focusing on adverse selection and screening.…”

Section: Joint Liability Lendingmentioning

confidence: 99%

Group lending and the role of the group leader

2009

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This paper investigates strategic monitoring behavior within group lending. We show that monitoring efforts of group members differ in equilibrium due to the asymmetry between members in terms of future profits. In particular, we show that the entrepreneur with the highest future profits also puts in the highest monitoring effort. Moreover, monitoring efforts differ between group members due to free-riding: one member reduces her level of monitoring if the other increases her monitoring effort. This effect is also at play when we introduce a group leader into the model. The individual who becomes the group leader supplies more monitoring effort than in the benchmark case. We empirically test the model using data from a survey of microfinance in Eritrea and show that the group leader attaches more weight to future periods than nonleaders in the group, which may explain why a large part of total monitoring is done by the leader.

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“…We assume that the borrower can consume the funds after voluntarily defaulting on her loans from local capitalists, but local capitalists can prevent the borrower from defaulting and investing these funds in future projects (in essence becoming her own banker for future projects). 2 Each lender incurs a unique cost of screening and monitoring the loan (let us call it transaction cost of lending) to a given borrower every time he enters into a loan contract with the borrower.…”

Section: The Modelmentioning

confidence: 99%

Franchising Microfinance*

Bubna

Chowdhry

2009

Review of Finance

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Financial intermediaries worldwide are seeking mechanisms for participating in micro lending.We consider a simple model where a bank may use informed "local capitalists" as intermediaries for on-lending. But the availability of multiple credit sources provides borrowers with an incentive to default voluntarily, making the bank's on-lending mechanism a non-starter. We explore whether a coalition of local capitalists, effectively limiting borrower's opportunity for defaulting multiple times, might be sufficient to facilitate on-lending. Instead, we find that a monopoly moneylender with superior enforcement technology can out-compete the local capitalist coalition if the moneylender also enjoys the smallest transactions costs of lending. We show that a credible competitive threat to the monopoly moneylender can only arise if the local capitalist coalition can also be made cost-effective either by direct subsidies or by measures such as standardization, economies of scale and implementation of best practices. We argue that Franchising is one potential mechanism that could deliver both cost-efficiencies as well as ability for local capitalists to form a coalition. JEL Classification: G21

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On the design of a credit agreement with peer monitoring

Cited by 207 publications

References 8 publications

Group lending and individual lending with strategic default

Group lending and individual lending with strategic default

Group lending and the role of the group leader

Franchising Microfinance*

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