Delegated Monitoring and Moral Hazard in Underdeveloped Credit Markets

23 Pages Posted: 5 Feb 2007

See all articles by Shubhashis Gangopadhyay

Shubhashis Gangopadhyay

India Development Foundation; University of Gothenburg; University of Groningen, Faculty of Economics and Business, Students; Indian School of Public Policy

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group

Abstract

This paper originates from the current move to individual-based lending systems by many microfinance institutions and the fear that this move will lead to a decrease in access to credit for the poor. More specifically, the paper examines how an individual-based lending scheme can be devised such that moral hazard issues can be addressed, even when straight forward individual lending is unable to do so. We show that the moral hazard problem can be solved if microfinance institutions hire informal lenders to monitor the borrowers. In addition, we show that by offering the informal lender a demandable debt contract a simple incentive scheme could be obtained that induces the informal lender to collect the necessary information, and to truthfully reveal this information.

Keywords: Moral Hazard, Underdeveloped Credit Markets, Delegated Monitoring

JEL Classification: D82, O16, O17

Suggested Citation

Gangopadhyay, Shubhashis and Lensink, Robert, Delegated Monitoring and Moral Hazard in Underdeveloped Credit Markets. Available at SSRN: https://ssrn.com/abstract=960932 or http://dx.doi.org/10.2139/ssrn.960932

Shubhashis Gangopadhyay

India Development Foundation ( email )

4101 DLF Phase IV
Gurugram, Haryana 122002
India
+91 9910991221 (Phone)

University of Gothenburg

Gothenburg
Sweden

University of Groningen, Faculty of Economics and Business, Students

Postbus 72
9700 AB Groningen
Netherlands

Indian School of Public Policy

Delhi
India

Robert Lensink (Contact Author)

University of Groningen - Department of Economics, Econometrics and Finance ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Wageningen UR - Development Economics Group ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

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