Joint Liability Lending in Microcredit Markets with Adverse Selection: a Survey

This paper reviews recent literature on joint liability lending in microcredit markets characterized by adverse selection. This mode of lending consists of granting individual loans to wealthless borrowers provided that they form groups: if a group does not fully repay its obligations, then the microlender cut off all members from future credit until the debt is repaid. Joint liability lending is able to extract information through a peer selection mechanism, with the effect of raising both repayment rates and welfare with respect to individual lending.microcredit, underdeveloped economies, joint liability lending.

Quality and Reputation: Is Competition Beneficial to Consumers?

In this paper we develop a model of product quality and firms' reputation. If quality is not verifiable and there is repeated interaction between firms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that competitive firms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner's (2002) one. Positive profit are generated in equilibria characterized by the emergence of a social norm which prescribes a minimum quality level. Moreover, we demonstrate that more concentrated industry structures deliver better quality and higher social and consumer welfare. This finding should induce cautiousness in enhancing competition when product quality is at stake. We derive our results in the specific context of after-sales service quality provided by insurance companies. Yet, we argue that our analysis is of general applicability.quality, reputation, Bertrand competition, insurance contracts.

Failing Firm Defense with Entry Deterrence

Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative offer of purchase, (iii) absent the merger, the assets to be acquired would exit the market. We focus on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked entry occurs and, when the industry is highly concentrated, consumer welfare is bigger because gains due to augmented competition exceed losses due to shortage of output.Failing Firm Defense, Entry Deterrence, Consumer Surplus

Do Social Enterprises Finance Their Investments Differently from For-proft Firms?

Using a longitudinal data set of balance sheets of 504 non profit and for-profit firms operating in the social residential sector in Italy, we investigate the relationship between capital structure and type of enterprise. The nondistribution constraint typical of nonprofit organizations increases the fraction of own capital on total investment: this is shown, by means of a theoretical moral hazard model, to reduce their leverage. By contrast, the intrinsecally high commitment of nonprofit entrepreneurs weakens the moral hazard problem: this augments leverage (ii). Our empirical analysis shows that once control for observable characteristics for-profitt companies have a leverage 6% higher than nonprofit enterprises, even if the latter faces lower credit costs. We explain this finding by arguing that effect prevails on effect.for-profit and nonprofit enterprises; capital structure

Technology Replaces Culture in Microcredit Markets: the Case of Italian MAGs

We collect data from three Italian microcredit institutions, MAG2, MAG4 and MAG6, which operate in Milan, Turin and Reggio Emilia respectively, by targeting two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations). Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza-Webb and we verify that both repayment rate and welfare increase, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, is able to extract information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers do not know each other and social sanctions are weak.microcredit, urban areas, production team lending.

Technology Replaces Culture in Microcredit Markets: the Case of Italian MAGs

Poor local information networks and weak social sanctions in urban settings make joint liability unable to guarantee high repayment rates to microlenders. Yet, microcredit programmes in Western Europe report good performance even if the majority of them charge no collateral. We collect data from three Italian microcredit institutions which operate in urban areas by granting individual loans without collateral to single entrepreneurs and teams (cooperatives and associations) and we find that teams repay with higher probability. On this basis we develop a microlending instrument that, like joint liability implemented in rural economies, extracts information from borrowers through a peer selection mechanism but, differently from joint liability, fits the urban context for it reproduces a cohesion among entrepreneurs based on a profit-maximizing behavior and not on social sanctions.microcredit; urban areas; adverse selection

Optimal Investment and Financial Strategies under Tax Rate Uncertainty

In this paper we apply a real-option model to study the effects of tax rate uncertainty on a firm's decisions. In doing so, we depart from the relevant literature, which focuses on fully equity-financed investment project. By letting a representative firm borrow optimally, we show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax rate uncertainty on investment timing.capital levy, corporate taxation, default risk, real options

Optimal Investment and Financial Strategies under Tax Rate Uncertainty

In this paper we apply a real-option model to study the effects of tax rate uncertainty on a firm's decisions. In doing so, we depart from the relevant literature, which focuses on fully equity-financed investment projects. By letting a representative firm borrow optimally, we show that debt finance not only encourages investment activities but can also substantially mitigate the effect of tax rate uncertainty on investment timing.Capital Levy, Corporate Taxation, Default Risk, Real Options

The Importance of Being Consulted

Does management consulting facilitate the access to credit for start-ups? This paper tries to answer the question by developing a theoretical framework where a firm applies for a bank loan to implement a risky project. The probability of success increases if the firm exerts a costly managerial extra-effort, but the bank is unable to observe such an effort: a moral hazard problem may therefore occur. During an economic downturn the project’s expected profitability is likely to be low relatively to the effort cost. In this case we find that credit is granted only if the bank hires a management consultant, even when the latter does not improve the business practice

Complementarity, coordination, and credit

We consider a start-up firm which applies for a bank loan to implement a project based on complementary activities. The firm has the possibility to improve the complementarity effect by coordinating the activities. Coordination is costly and can be made either by using internal human resources or by hiring a consulting firm. In the former case the choice of coordination is not verifiable by the bank and a moral hazard problem arises, while in the latter information is symmetric. The role of consulting services is thus to mitigate the informational problem. Without consulting, the firm does not coordinate and either obtains no funding or the surplus of the project is not maximized