ECN 503 - MIDTERM 2 QUESTIONS AND ANSWERS
Non-market institutions - Answers --exist in low income areas
-make little use of formal legal system
-based on convention, tradition
-often not anonymous
Advantages of non-market institutions in enforcing contracts - Answers -- relies on
social norms
(kinship and regional ties work as enforcement devices)
Examples of non-market institutions - Answers -- group lending
- credit cooperatives
- rotating savings and credit associations
How to protect against risk of fluctuating income? - Answers -- savings
or
- diversyfying sources of income
What is the pattern of savings for the poor? - Answers -save in periods when income is
high, draw on savings when times are low
Definition of "Peer Monitoring" - Answers -individuals who interact frequently tend to
know each other well; greater ability to monitor each other than formal financial
institution can
What results in lower variation in income: no insurance or mutual insurance - Answers -
mutual insurance
When is Peer Monitoring used? - Answers -group lending & credit cooperatives
Group Lending - Answers -Loan given to a group rather than a single borrow
(based on joint liability)
Example of Group Lending - Answers -Grameen Bank
- located in Bangladesh
-founded by economist Muhammad Yunus (Nobel Peace Prize 2006)
Definition of "Credit Cooperatives" - Answers -another institution that uses local
information and enforcement
credit cooperatives borrow from a bank or gov't and distribute funds among their
members of loans
, Do credit cooperatives work? - Answers -worked well in Germany in 19th century
didn't work well when applied to other countries (i.e. Ireland)
Non-market institution: "Rotating savings and credit associations" - Answers -make use
of local information and enforcement
a group of individuals gets together periodically, allocates a pot of funds to one group
member - process continues until each member has won the pot once
enhances household capital accumulation of indivisible items
Examples of "rotating savings and credit associations" - Answers -Chit funds (India)
Hui (Taiwan)
Tontines (Senegal)
Aye (Korea)
Insurance type in northern Nigeria - Answers -Credit
Nigerian religion and how it relates to credit as insurance - Answers -Islamic
- islamic law condemns charging interest on loans
-usury or fixed repayment periods are generally prohibited
Agriculture in Nigeria subject to: - Answers -- seasonal fluctuations
- random shocks
- uncertain and irregular income flows
- people need to borrow and lend in times of distress
What does the disincentive to lend come from in Nigeria - Answers -Islamic religion:
structure against charging interest
definition: "Consumption Smoothing" - Answers -maintain similar levels of consumption
under both good and bad outcomes
rural Nigeria credit market - Answers -no formal credit market (i.e. bank)
- in form of inter household insurance against income shortfalls
90% of Nigerian households are:
50% of Nigerian households took part in both: - Answers -- borrowers or lenders
annually
- lending and borrowing in one year
Moral Hazard - Answers -two contracting parties, outcome depends on actions of one
party, these actions aren't observed by the other party
Non-market institutions - Answers --exist in low income areas
-make little use of formal legal system
-based on convention, tradition
-often not anonymous
Advantages of non-market institutions in enforcing contracts - Answers -- relies on
social norms
(kinship and regional ties work as enforcement devices)
Examples of non-market institutions - Answers -- group lending
- credit cooperatives
- rotating savings and credit associations
How to protect against risk of fluctuating income? - Answers -- savings
or
- diversyfying sources of income
What is the pattern of savings for the poor? - Answers -save in periods when income is
high, draw on savings when times are low
Definition of "Peer Monitoring" - Answers -individuals who interact frequently tend to
know each other well; greater ability to monitor each other than formal financial
institution can
What results in lower variation in income: no insurance or mutual insurance - Answers -
mutual insurance
When is Peer Monitoring used? - Answers -group lending & credit cooperatives
Group Lending - Answers -Loan given to a group rather than a single borrow
(based on joint liability)
Example of Group Lending - Answers -Grameen Bank
- located in Bangladesh
-founded by economist Muhammad Yunus (Nobel Peace Prize 2006)
Definition of "Credit Cooperatives" - Answers -another institution that uses local
information and enforcement
credit cooperatives borrow from a bank or gov't and distribute funds among their
members of loans
, Do credit cooperatives work? - Answers -worked well in Germany in 19th century
didn't work well when applied to other countries (i.e. Ireland)
Non-market institution: "Rotating savings and credit associations" - Answers -make use
of local information and enforcement
a group of individuals gets together periodically, allocates a pot of funds to one group
member - process continues until each member has won the pot once
enhances household capital accumulation of indivisible items
Examples of "rotating savings and credit associations" - Answers -Chit funds (India)
Hui (Taiwan)
Tontines (Senegal)
Aye (Korea)
Insurance type in northern Nigeria - Answers -Credit
Nigerian religion and how it relates to credit as insurance - Answers -Islamic
- islamic law condemns charging interest on loans
-usury or fixed repayment periods are generally prohibited
Agriculture in Nigeria subject to: - Answers -- seasonal fluctuations
- random shocks
- uncertain and irregular income flows
- people need to borrow and lend in times of distress
What does the disincentive to lend come from in Nigeria - Answers -Islamic religion:
structure against charging interest
definition: "Consumption Smoothing" - Answers -maintain similar levels of consumption
under both good and bad outcomes
rural Nigeria credit market - Answers -no formal credit market (i.e. bank)
- in form of inter household insurance against income shortfalls
90% of Nigerian households are:
50% of Nigerian households took part in both: - Answers -- borrowers or lenders
annually
- lending and borrowing in one year
Moral Hazard - Answers -two contracting parties, outcome depends on actions of one
party, these actions aren't observed by the other party
