Essays on incomplete credit markets in the developing countries.

This dissertation examines the impact of incomplete information on low income credit markets in the developing countries and analyzes mechanisms that substitute for these information deficiencies. In the first study, we examine the role group loan contracts can play in allowing a lender to screen borrowers with heterogeneous risk types. It is demonstrated that by offering an appropriate set of loan contracts, lenders can guarantee that only low risk borrowers will be willing to accept group loan contracts in equilibrium. The second study consists of a case study of Banco Solidario's group lending program in La Paz, Bolivia. In this study we evaluate some of the existing theoretical research on group lending against Banco Solidario's own lending experiences in Bolivia. Lastly, in the third study we examine the theoretical implications of information externalities concerning client types on the behavior of lenders operating in new credit markets. Here, it is found that an incumbent lender can optimally reduce the externalized flow of valuable information to other lenders by influencing the investment behavior of his clients through appropriate contractual design.