When Is the Optimal Lending Contract in Microfinance State Non-Contingent?

Jeon, Doh-Shin and Menicucci, Domenico (2010) When Is the Optimal Lending Contract in Microfinance State Non-Contingent? TSE Working Paper, n. 10-146

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Official URL: http://tse-fr.eu/pub/22432


Whether a microfinance institution should use a state-contingent repayment or not is very important since a state-contingent loan can provide insurance for borrowers. However, the classic Grameen bank used state non-contingent repayment, which is puzzling since it forces poor borrowers to make their payments even under hard circumstances. This paper provides an explanation to this puzzle. We
consider two modes of lending, group and individual lending, and for each mode we characterize the optimal lending and supervisory contracts when a staff member (a supervisor) can embezzle borrowers' repayments by misrepresenting realized returns. We identify the main trade-off between the insurance gain and the cost of controlling the supervisor's misbehavior. We also found that group lending dominates individual lending either by providing more insurance or by saving audit costs.

Item Type: Monograph (Working Paper)
Language: English
Date: 9 March 2010
JEL codes: O16 - Economic Development - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
D82 - Asymmetric and Private Information
G20 - General
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 18 Jan 2012 06:01
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:22432
URI: http://publications.ut-capitole.fr/id/eprint/3340

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