Joint Liability Among Bank Borrowers

A common feature of financial intermediaries is that the welfare of one borrower is adversely affected by the poor performance of other borrowers. That is, there exists a degree of joint liability among the borrowers of a financial intermediary. This paper provides an explanation for this observation. It demonstrates that in Krasa and Villamil''s [14] formalization of a financial intermediary as a delegated monitor, intermediation with joint liability between borrowers Pareto dominates intermediation without joint liability.