Peer Monitoring and Moral Hazard in Underdeveloped Credit Markets

This paper was presented at the international conference "Does Microfinance Work"? It grapples to understand how group lending systems may avoid moral hazard, and whether group lending systems are more or less efficient than delegated monitoring systems. The paper aims to:

• Develop a group lending model that provides a solution to moral hazard problems that may arise in groups;
• Compare a peer monitoring system with an individual lending scheme with a delegated monitor in their efficiency in reducing moral hazard problems.

The authors illustrate the following aspects:

• Individual lending without monitoring;
• Group lending with costless monitoring;
• Group lending with costly peer monitoring;
• Individual borrowing with a delegated monitor;
• Comparison between the suggested and existing models.