This note argues that the joint liability contracting equilibria worked out in Ghatak(2000) have a serious drawback in that, even though incentive compatible ex ante, they violate ex post rationality. For such contracts to be feasible, banks should be able to extract more under failure than under success. However, when we alllow for this, it may help explain some important empirical observations on joint liability lending.
|Number of pages||8|
|Publication status||Published - 2001|