Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times.To analyse this,we study a mechanism design problem where borrowers share information about each other,but their limited side contracting ability prevents them from writing complete insurance contracts.We derive a lending mechanism which efficiently induces mutual insurance.It is necessary for borrowers to submit reports about each other to achieve efficiency.Such cross-reporting increases the bargaining power of unsuccessful borrowers,and is robust to collusion against the bank.
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