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    Optimal collective contract without peer monitoring

    Daripa, Arup (2005) Optimal collective contract without peer monitoring. Working Paper. Birkbeck, University of London, London, UK.

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    If entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature emphasizes improvements through non-market organizations that harness local information through peer monitoring. I investigate the complementary question of designing a credit mechanism when local information is limited, disabling peer monitoring. I show that a pooling mechanism that does not rely on peer monitoring can implement a market for rights-to-borrow, restoring efficiency. The mechanism achieves a strict Pareto improvement - providing incentive for each type of agent to join. Further, even though the mechanism involves pooling - and consequent implicit transfers from better types to worse types - it has a “collective” feature that makes it immune to the Rothschild-Stiglitz cream-skimming problem under competing contracts. Finally, the presence of even weak local information implies that the mechanism cannot be successfully used by formal lenders. Thus a local credit institution can emerge as an optimal response to the informational environment even without peer monitoring. I apply the results to contracts offered by rural moneylenders in developing countries.


    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0519
    Keyword(s) / Subject(s): Informal Credit, Market for Rights-To-Borrow, Participation Incentives, Competition in Contracts and Cream Skimming, Local Information, Rural Moneylending
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Depositing User: Administrator
    Date Deposited: 29 Mar 2019 13:51
    Last Modified: 02 Aug 2023 17:50


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