nep-mfd New Economics Papers
on Microfinance
Issue of 2007‒11‒24
two papers chosen by
Olivier Dagnelie
Instituto de Analisis Economico, CSIC

  1. Microfinance, Subsidies and Dynamic Incentives By Suman Ghosh; Eric Van Tassel
  2. Lending to uncreditworthy borrowers By Rajdeep Sengupta

  1. By: Suman Ghosh (Department of Economics, College of Business, Florida Atlantic University); Eric Van Tassel (Department of Economics, College of Business, Florida Atlantic University)
    Abstract: In this paper we develop a two period model of a credit market to study the interaction between a monopolistic moneylender and a subsidized microfinance institution. We assume that lenders face a moral hazard problem that is diminished as agents are able to take increased equity positions in their production projects. In this setting, we identify a range of subsidy levels for which the behavior of the moneylender complements the poverty reduction mission of the microfinance institution. We also explain why a policy of offering subsidized loans in the second period to agents who are poor due to a project failure in the prior period, does not distort agents’ incentives to work hard and save in the first period. By varying the subsidy level available to the microfinance institution we discover that for small subsidies the moneylender may be better off with the microfinance institution in the market, and that when subsidies are excessive this can harm the poverty reduction mission of the microfinance institution.
    Keywords: microfinance, poverty, moral hazard, contracts
    JEL: O12 G21 D86
    Date: 2007–11
  2. By: Rajdeep Sengupta
    Abstract: This paper models entry and competition in "high-risk" credit markets. An incumbent lender's advantage over any outside bank derives from its knowledge of (i) the risk profile of its (creditworthy) clients and (ii) uncreditworthy types in the borrower population. Screening is costly and the uninformed lender's ability to use collateral as a screening mechanism depends on its cost advantage over its informed rival. Nevertheless, the outside bank can pool uncreditworthy borrowers with creditworthy types, but only if it has a low cost of funds. Therefore, while a secular decline in the cost of funds does not help outside banks to screen uncreditworthy borrowers, it allows them to pool these borrowers with creditworthy types. This not only facilitates entry of outside banks into "high-risk" credit markets, but also makes it optimal for them to include non-creditworthy borrowers in their loan portfolio. The framework is relevant for explaining the recent entry of outside banks into the "subprime"-end of the loan market, for example, loans to the lowest end of small businesses in developing countries - also known as microfinance.
    Keywords: Credit control - United States ; Bank loans - United States
    Date: 2007

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