Journal Article

Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies

Ashok S. Rai and Tomas Sjöström

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 1, pages 217-234
Published in print January 2004 | ISSN: 0034-6527
Published online January 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00282
Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies

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Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times. To analyse this, we study a mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross-reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank.

Keywords: G21; O16

Journal Article.  10598 words.  Illustrated.

Subjects: Banking ; Economic Development

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