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Peer Monitoring and the Urban Police: Lessons from the Microeconomics of Microfinance

Tuesday, June 2, 2020 14:03

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Information is highly valuable and costly to acquire. Some of us know more about some things than others. A mother of a young child knows more about the child’s health and personality than does the child’s teacher. A friend knows more about you than a stranger.

In the developing world, lenders have utilized these peer to peer networks to create incentives for sharing information. In the field of microfinance, people in the same village receive a small loan and there is a risk that the lender will not be paid back. Borrowers can take costly actions to increase the likelihood that their projects succeed and thus can pay back the lender. The field of microfinance ponders how to arrange the “rules of the game” to encourage loan repayment (i.e good behavior).

Two of the winners of the 2019 Nobel Prize in Economics discuss group liability in this article (see section 4.2).

In the developing world when borrowers know that they will have to pay a $ penalty if other neighbors default on their loans, this affects who chooses to take a loan and how they interact with their neighbors as they now have a stronger incentive to monitor and report on them. In the language of economics, issues of adverse selection and moral hazard arise here.

In the midst of the recent urban riots, would different people select to become urban police and would they be more likely to monitor each other and report information to 3rd Party Review boards if there is a type of “group liability” in play. “Don’t Snitch” is often discussed in urban settings about not revealing information to the police.

Should the police create new rules of the game to encourage “snitching” about fellow police in order to share information about officers concerning those revealing that they may impose significant social costs? The police have administrative records that help with such statistical profiling. Would police unions oppose such new rules if they help to both change the composition of the police force and incentivize behavioral change?

In 1973, Al Pacino starred in the movie Serpico about a cop who reveals corruption at his department. He was not treated well. Under what rules of the game, would more “Serpicos” step up?

Source: http://greeneconomics.blogspot.com/2020/06/peer-monitoring-and-urban-police.html

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