Paper
Joint-liability Loans Under Moral Hazard
Joint liability loans: according to the game theory
36 pages
This technical paper presents the advantages of monitoring joint liability loans through peers as compared with external monitoring. The paper also analyzes quantitatively, the higher motivations for effective monitoring of joint liability loans by peers.
Using the game theory, the paper presents:
- A benchmark individual liability monitored lending model under conditions of free entry, and competition in the lending market;
- A comparison of the individual liability model with group-loans, contrasting their properties and lending arrangements to show where each type of intermediary structure will be optimal;
- The role of collusion in monitoring of loans.
The paper argues that for effective peer monitoring of joint liability of loans, it is important to note:
- The timing of distribution of loans;
- All the members of the group do not have a loan at the same time.
The paper concludes that it is imperative to create effective legal framework for contract arrangements between low liquidity individuals and new credit opportunities. Joint liability loans are an innovative way of taking credit to the poor and also ensuring its repayment.
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