Peer Monitoring and Credit Markets

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ID: 294874
1990
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Abstract
A major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced. One partial solution is peer monitoring: having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt. Peer monitoring is largely responsible for the successful financial performance of the Grameen Bank of Bangladesh and of similar group lending programs elsewhere. But peer monitoring has a cost. It transfers risk from the bank, which is in a better position to bear risk, to the cosigner. In a simple model of peer monitoring in a competitive credit market, this article demonstrates that the transfer of risk leads to an improvement in borrowers' welfare.
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openalex_W2102543373 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Joseph E. Stiglitz
Journal The World Bank Economic Review
Year 1990
DOI
10.1093/wber/4.3.351
URL
https://doi.org/10.1093/wber/4.3.351
Keywords Keywords not found

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