Social collateral, dynamic incentives, and joint liability in a two‐step trust game: Lending to the unbankable

摘要

Asymmetric information and lack of collateral creates asuboptimal allocation of financial resources to those inmost need. When uncollateralised borrowers approachfinancial institutions, the presence of moral hazard andadverse selection results in no lending. Conversely, grouplendingcontracts—joint liability, dynamic lending, andsocial cost for defaulting—control for information asymmetriesand create a co‐operative trust game betweenborrowers leading to an undominated optimal strategy torepay, and therefore, for the lender to Give. Group lendingproves superior to typical individual borrowing andlending when no collateral is available. Social collateraland trust are fundamental pieces of the successful work ofMicroFinance. Resulting contracts and correspondentpayoffs are Pareto efficient.