Mechanism Designing For Rural Micro-Group-Lending

Rural micro-group-lending, namely peasant households form a group to apply for a loan. Peasants’ financial difficulty is because they lack collaterals and guarantors and there is incomplete credit information system in rural areas. But Grameen bank in Bangladesh can provide loans to many poor borrowers and get surprisingly high repayment rate. Group lending was introduced into China by rural development institute chinese academy of social sciences in 1993, nearly 20 years of experience shows that rural micro-group-lending is a very effective pattern in rural financial, it has helped to significantly improve farmers’ income and eliminate absolute poverty. But there are still many problems, such as peasant households may collude to hide information and action, peasant households may choose to default, how should the government provide fiscal subsidy to MFIs and Peasant Households, and how to ensure peasant households could continue to get the loan, etc. Solving these problems would ensure the healthy development of the new financing way of joint guarantee and be very important for the construction of the new socialistic countryside.Based on reviewing the related research of mechanism design, collusion, group lending, this dissertation first uses the mechanism design theory to design individual lending contracts and collusion-proof group lending contracts with adverse selection. But, when all types of peasant households form group to apply for loan, if the group has the safe peasant household, the safe or mixed group would likely to lie to report that he is the risky group, then the safe peasant household act in the way of the risky peasant household or his own way. Therefore, this dissertation still uses the mechanism design theory to design individual loan contracts and collusion-proof group lending contracts with asymmetric information. This dissertation also designs collusion-proof group lending contracts which are based on joint liability and assortative matching (or without assortative matching), and studies how should government provide fiscal subsidy to MFIs for stimulating them to provide group contracts to more villages and how should government provide fiscal subsidy to rural households for avoiding them to choose default. Above researches on collusion-proof of group lending are based on single period, the problem of multi-period rural micro-group-lending which could ensure peasant household continue to get the loan has not been resolved. So considering the time value of money, this dissertation finally designs the multi-period rural micro-group-lending contracts.The innovations of this paper are mainly in the following aspects:First, using the mechanism design theory, this dissertation designs collusion-proof rural micro-group-lending contracts.Considering the effort of the risky peasant household, this dissertation designs collusion-proof rural micro-group-lending contracts with adverse selection. While there are adverse selection and moral hazard, the general way is first solving one kind of asymmetric information. Using the method that Laffont researched on collusion-proof group-lending contracts with adverse selection(moral hazard), this dissertation increases constraints in Laffont’s model to design collusion-proof rural micro-group-lending contracts to avoid adverse selection and moral hazard, and studies the effect of structure of the social members in village and project revenue on MFIs’ decisions. Second, this dissertation researches how should the government provide fiscal subsidy to MFIs and peasant households.This dissertation designs collusion-proof group lending contracts which are basedon joint liability and assortative matching (or without assortative matching). And whether the government needs to intervene when MFIs provides collusion-proof group lending contracts for peasant households in villages, if needed, the problems of the condition and extent of interference have not yet been fully resolved in the previous researches. This dissertation attempts to research on the condition and amount of subsidies for MFIs and peasant households, and study the effect of the government subsidies on behavioral choices of MFIs and peasant households.Finally, this dissertation designs the multi-period rural micro-group-lending contracts.The MFIs’ ability to continue as a going concern and the likely of peasant households choosing to default determines whether the peasant households could continue to get the loan needed for the investment project before he can independently invest projects. So when default is exogenous (or endogenous), considering the time value of money, this dissertation designs the multi-period rural micro-group-lending contracts with adverse selection.