In what way could particular strategy be considered

Reference no: EM131916075

Problem

Moral hazard is a problem because poor borrowers lack collateral. If they had collateral, it could be taken away, providing a punishment to shirkers.

a. Can lenders circumvent moral hazard if they are given the right to harshly punish borrowers that have put insufficient effort by, say, throwing them into a "debtors' prison?"

b. Would you expect borrowers to take this risk?

c. In what way could this particular strategy be considered an improvement over the status quo, characterized by credit rationing and limited financial access?

d. Why is such a debtors' prison strategy likely to raise major problems in terms of incentives for microfinance institutions, and why would it challenge common perceptions on fairness and equity?

Reference no: EM131916075

Questions Cloud

Comment on the main lesson drawn from the given exercise : Comment on the main lesson drawn from this exercise with respect to the use of collateral to facilitate credit access.

Compute the threshold interest rate that lender can charge : Compute the threshold interest rate that the lender can charge to induce an adequate effort level from the borrower.

Explain whether you would expect the bank to be repaid : Consider a project that needs a fixed investment I = $100. Explain whether you would expect the bank to be repaid in the ex post moral hazard scenario and why.

If prize increases at the same rate what will it be in 2043 : In 1893, the first Green Jacket Golf Championship was held. The winner's prize money was $230. In 2015, the winner's check was $1,570,000.

In what way could particular strategy be considered : In what way could this particular strategy be considered an improvement over the status quo, characterized by credit rationing and limited financial access?

Calculate the annual percentage : The winner's prize money was $200. In 2015, the winner's check was $1,540,000. What was the annual percentage increase in the winner's check over this period?

Explain the social inefficiencies in the given scenario : Think of moneylenders as credit agents operating in a monopolistic environment. Explain the social inefficiencies in this scenario.

What was the percentage increase per year in the winner : What was the percentage increase per year in the winner's check over this period?

How can one reconcile the idea of loans with zero percent : How can one reconcile the idea of loans with zero percent interest with the existence of moneylenders charging rates above 100 percent per year?

User Account

All Pages