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Peer Monitoring and Credit Markets

By Joseph E. Stiglitz

Abstract

A major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayments 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 to an improvement in borrowers' welfare

Topics: Economics
Publisher: 'Columbia University Libraries/Information Services'
Year: 1990
DOI identifier: 10.7916/D8K364NS
OAI identifier: oai:academiccommons.columbia.edu:10.7916/D8K364NS

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