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THEORY OF JOINT LIABILITIES, ADVERSE SELECTION, ASSORTATIVE MATCHING AND SELF-FINANCING

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Author(s): Ramu Maurya

Journal: International Journal of Economics and Research
ISSN 2229-6158

Volume: 02;
Issue: 05;
Start page: 108;
Date: 2011;
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Keywords: adverse selection | assortative matching | credit market imperfection | joint liability | payoffs

ABSTRACT
Microfinance is seen to be a remedy of poverty eradication and globally it is perceived that microfinance can remove the problem of poverty. Basically microfinance works on joint liability model. Traditional theories of credit lending say that rural credit markets are imperfectly competitive and acquiring information about borrowers type that is who is risky and who is safe is not costless. This market imperfection leads to high interest rate and drives out safe borrower from the credit market. In economic literature this problem is considered as adverse selection problem. Joint liability model try to solve the problem of adverse selection through group lending.This paper explores the idea of joint liability model and tries to solve the problem of adverse selection through the positive assortative matching. Paper concludes that in positive assortative matching, the payoffs of borrowers would be more than the payoffs of negative assortative matching. Paper, also try to show that self financing can bring down the interest rate and size of penalty and improve the borrower’s expected payoffs
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