Is Grameen Lending Efficient?

The paper uses a mechanism design perspective - game theory - to investigate joint liability and client reports on each other. It sees that any justification for joint liability loans must rely on limitations in side contracting among the agents and concludes that:

• Cross reporting is valuable even if the agents can collude on the reports they send to the bank;
• When villagers collude against the bank, but are unable to enforce state contingent contracts with each other a mechanism that combines joint liability and cross-reporting is efficient;
• Individual loans and joint liability loans without cross reports are not efficient;
• Replications of the Grameen Bank that use joint liability but not cross reports will probably be unsuccessful.