Efficient Lending in Village Economies
Ashok S. Rai, Harvard University and
Tomas Sjostrom, Penn State University
February 2000

Abstract
This paper investigates efficient lending schemes when borrowers have 
an information advantage over the bank, as they typically do in village 
economies. If villagers can write complete side contracts, individual 
loans and joint liability loans both deliver the efficient outcome. If 
the villagers cannot enforce any side contracts, the efficient mechanism 
is a simple cross reporting scheme. Joint liability loans emerge as the 
uniquely efficient mechanism only in a rather special case of  
"incomplete side contracting.'' Thus, contrary to conventional wisdom, 
we find little support for joint liability loans. Field evidence from 
the Grameen Bank in Bangladesh and its replications suggests that 
microcredit programs encourage cross reporting and do not enforce joint 
liability.