A theory of progressive lending

Dasgupta, Dyotona and Mookherjee, Dilip (2023) A theory of progressive lending. Games and Economic Behavior, 137. pp. 211-227. ISSN 0899-8256

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We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment in a context where the borrower can accumulate wealth, has intertemporal consumption smoothing preferences, and the lender has some sanctioning power following default. We show the negative results of Bulow and Rogoff (1989) do not apply irrespective of the extent of sanctions, the borrower's preferences for smoothing, initial wealth or relative welfare weight. Borrowing, investment and wealth grow and converge to the first-best. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size

Item Type: Article
Keywords: Borrowing Constraints | Dynamic Contracts | Microfinance | Moral Hazard | Progressive Lending
Subjects: Social Sciences and humanities > Economics, Econometrics and Finance > Economics
JGU School/Centre: Jindal Global Business School
Depositing User: Amees Mohammad
Date Deposited: 09 Dec 2022 10:06
Last Modified: 09 Dec 2022 10:06
Official URL: https://doi.org/10.1016/j.geb.2022.11.005
URI: https://pure.jgu.edu.in/id/eprint/5067


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