Ex-post moral hazard refers to the behavioural change of an individual or a group of individuals after an outcome of a given event. Moral hazards occur whenever two parties get into an agreement for one party to cover the other against a given risk but the prior decides to exploit the latter. When the covered party engages in events deemed risky, because he or she is protected by the other party against the risk in question, then such a concept is referred to as a moral hazard in an economic register. In the insurance world, the policyholder, we can see moral dangers through policyholders who engage in activities that leave them innately prone to accidents, accidents caused by nature, carelessness or even those that are inclined to criminality. In a practical example, a lawsuit in New York against Johnson and Johnson; the executives knew before recalling an artificial hip that was troubled in 2010 claiming it contained an error in the design. However, the plaintiff alleges that the company failed to provide the same information to physicians and the patients. For a while now, moral hazard has continuously disadvantaged credit markets. Experts have raised concern that group lending or instead joint liability can act as a useful tool in dealing with moral hazard. However, the same tactic has not worked entirely efficiently since unwillingness to pay loans remains to be the dominant cause of default. On the other hand, we cannot conclude that joint liability does not help in the alleviation of moral hazard amongst the poor.
First and foremost, one of the significant factors that are causing financial institutions to lose to the risk of moral hazards is the individual liability. In a case of personal debt, if the plaintiff wins in a court of law against your enterprise, he or she can satisfy his or her due out of your possessions. This resumption would involve all that has its status under you, say, home, bank account even automobiles. This cause is because individual liability, lending to one person, exposes the lender to intentional risks incurred by the borrower. Therefore, in rural economies, where several borrowers are needy and not able to repay their credit ultimately, they tend to take advantage of the cover provided to them. This fact is why moral hazards cannot be alleviated if at all individual liability form of credit arrangement is still in practice.
On the other hand, whenever it comes to joint liability, all parties in the group that has taken the credit are responsible for each other's confidence. None of the group members can be able to borrow any further if the group fails to repay the loan. Loans contracted under joint liability arrangements are meant to control the collective security among the members of the community. Joint liability, therefore, helps to manage the risk for lenders devoid of requiring general obligation. This form of lending arrangement puts the borrowers at a new kind of threat which is the morally hazardous character of other members in the borrowing cluster for whom they are liable financially. The mode of borrowing as a group, therefore, helps since the collective security existing between the borrowers which create social relationships. These relationships are faced with a risk which in turn mitigates the possibilities of moral hazards. This works since if one party is not trustworthy or rather engages in risky activities that may put the other members on financial liability, he or she might have costs imposed on her by the other members of the group. To ease the analysis, social sanctions are viewed as financially equivalent costs.
Deciding whether to lend under group or individual liability remains a primary task to a majority and even all the lenders today. This is also harder when designing the products of loans in credit market for a developing economy and majorly amongst the poor. However, even after several types of research, lenders cannot affirm to have grasped the respective merits for both methodologies. Apart from all that, the performance of group lending or instead joint liability in mitigation of moral hazards has proved to be more useful in the milestone. However, more practices and methods need to be applied to have a better grip and control on this matter.
Joint liability is a liability imposed on members of a given group, and sometimes it can be the same or not similar to the total amount that the other group member is supposed to repay. Practically, this liability or slightly cost is taken to be a denial of a loan in later times. For instance in a group of two borrowers, if member A can repay back loan value C but the second member B is not able to repay back loan R, then the former will owe the lender value C+R (Ghatak & Guinnane, 1999, pp.195-228).
It is from this application that we get to see the effectiveness of joint liability programs in different forms. The first is an application of joint liability in adverse selection. This type of collection involves a borrower faced by two types of projects: A and B. With collateral the borrowers get two optimal options to decide from; either low-interest rate with a high guarantee or high-interest rate with low insurance. However, joint liability comes into force when collateral is unavailable. The liability program is used in sorting. As a result, the lenders can avoid positive, assertive ways like risky and risky assortment or safe and safe assortment. This program leaves the borrower with two choices to make; high interest and low joint liability or low interest and high joint liability.
The second effectiveness is how joint liability as applied to the alleviation of ex-ante moral hazard. If members decide their efforts without dependency on observation by other members, then joint debt does not affect the optimal levels of energy. However, whenever the shots are chosen jointly by all members of the group, a rise is observed in the optimal levels. Consequently, incentive constraints relax. Taking that the cost of monitoring is high but not too high, and the price of social sanction is also high, the control gets done by the members of the groups themselves, namely peer monitoring, can reflect definite improvements on the rates of payment.
One more application of this program is in cost state verification. Cost state verification refers to the fact that the lender must incur a cost to make sure that the borrower is indeed not able to reimburse the credit (Ghatak & Guinnane, 1999, pp.195-228). In this contract, the borrower is expected not to lie on any incentive concerning the results of the project. Secondly, the lender is supposed to break evenly while reducing the cost of verification. Practically, since the competition in the market is stiff, the payoff expected from the borrower is maximised and not the profit of the lender. There could be two effects of joint liability; first is the benefit of the lender to have one member incurring the cost of a failing reimbursement of a loan. Secondly, the lender will lose if the added yoke induces the borrower to evade willfully on his or her credit as well. When all is summed up, the effect is only fair when the borrower does not receive a penalty from the lender alone but also from the members of the joint group. However, that can happen if the social relationship is close to the members.
Finally, moral hazards constitute a significant source of lose to a lot of financial institutions which offer credit. In as much as joint liability works on several occasions, it is not safe to assume that it shall always work to an adequate level of mitigation. More ways of reducing moral hazards should be introduced with time is all the struggle is to be a success in most developing countries.
Risks are standard for all people in developed and developing countries alike. However, the people in developing countries do not have access to formal insurance mechanisms which are very important for the mitigation of the risks in the event of unexpected income shocks. Households then opt to pool common dangers through informal systems like gifts and loans. The problem that arises from these informal insurance methods is their effectiveness. Household insurance becomes an option, but the question remains, is the mechanism effective for the eccentric risks? Results from a field study are presented by (Robinson, 2012) showing how the effectiveness of intra-house risk was sharing as a full insurance measure.
142 married couples in the western part of Kenya were assessed for eight weeks in the experimentation of this hypothesis. There was a 50 % probability of each receiving an income shock equivalent to the US $2.14 both parties being aware of their counterpart's award (Robinson, 2012, pp.140-164). The experiment tests the efficiency compares the differences in the responsiveness to the private consumption by their partners of the shocks received. The basis is on the assumption that despite the difference in the preferences of men and women, the shocks are small concerning their income that they may not affect the household bargaining power.
Sources of data
The paper has used three data sources. The enumerator asked Fundamental questions on demographics, savings, credits and related issues as a background study. The different research analyzed risk aversion measurement. Participants were asked to choose how much they would advance on a risky venture that gave back two and a half times the investment amount half the time. Most importantly, the mode of data collection used was weekly monitoring of the couple's behaviour for eight weeks. An enumerator visited the couples separately and administered detailed investigative questions on some topics including labour, income, and expenditure. The survey was conducted when both spouses were available and could be surveyed at the same time. In the event of one of the spouses being untraceable for the review, the couple was dropped from the survey. The data collected was represented in tables for further analysis.
The experiment obtained samples from 142 coupes selected from daily income earners. These groups were chosen because the basis of the research is on transitory shocks on income received weekly, which are more frequently encountered in everyday income earners than in other categories of labour for example farmers. The participant for the sampling in the paper also included the spouses of the participants. Samples were taken from semi-urban towns. The participants were picked from their places of work by an enumerator who asked them fundamental background questions like whether or not they were married first and foremost. After the enumerator had picked out the married couple, the next step was to single out those that were willing to participate in the eight-week-long survey together with their spouses with regular monitoring. The prior requirement was spelt out and those that were willing to participate proceeded to give their contact information.
The income shocks for the experiment were administered, and the odds of either spouse receiving the shock was half every week. Therefore, there are weeks when both spouses got the shock and others when both did not. By design, the shocks were minimal in comparison to the total lifetime income but not trivial. Both spouses were offered exhaustive information thus nullifying the possibility of inefficiency as a result of non-disclosure. The experiment is advantageous in the collection of data enabling the comparison of the results from the research in real-world responses to fluctuations in weekly labour income. A demerit of the study was that the income shocks provided were not an accurate repre...
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