New Economics Papers
on Microfinance
Issue of 2008‒03‒25
three papers chosen by
Aastha Pudasainee and Olivier Dagnelie


  1. Financial Development and Poverty Reduction: Can There Be a Benefit Without a Cost? By Kangni Kpodar; Sylviane Guillaumont Jeanneney
  2. Risk aversion in low income countries: Experimental evidence from Ethiopia By Yesuf, Mahmud; Bluffstone, Randy
  3. Rosca Participation in Benin: a Commitment Issue By Olivier Dagnelie; Philippe LeMay-Boucher

  1. By: Kangni Kpodar; Sylviane Guillaumont Jeanneney
    Abstract: This article investigates how financial development helps to reduce poverty directly through the McKinnon conduit effect and indirectly through economic growth. The results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities but to some extent fail to reap the benefit from greater availability of credit. Moreover, financial development is accompanied by financial instability, which is detrimental to the poor. Nevertheless, the benefits of financial development for the poor outweigh the cost.
    Date: 2008–03–19
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:08/62&r=mfd
  2. By: Yesuf, Mahmud; Bluffstone, Randy
    Abstract: "Production systems in low-income developing countries are generally poorly diversified, focusing on rainfed staple crop production and raising livestock. These activities are inherently risky and investment and production decisions by farm households are therefore made within environments that are affected by risk. Because of poorly developed or absent credit and insurance markets it is difficult to pass any of these risks to a third party. As a result, it is often found that even when the expected net return is high, households are reluctant to adopt new agricultural technologies when they involve risk. Better understanding risk behavior will be essential for identifying appropriate farm-level strategies for adaptation to climate change by low-income farmers. Despite risk's potentially central role in farm investment decisions, there have been few attempts to estimate the magnitude and nature of risk aversion of farm households in low-income developing countries. To partially close this gap, this paper uses an experimental approach applied to 262 households in the Ethiopian highlands with real payoffs. By incorporating both small and large stakes and gains and losses into the experiment, we test for the presence of low stake risk aversion and loss aversion. We find that more than 50 percent of the households are severely or extremely risk averse. This contrasts with studies in Asia where most household decision-makers exhibit moderate to intermediate risk aversion. We find that households that stand to lose as well as gain something from participation in games are significantly more risk averse than households playing gains-only games. This strongly suggests that agricultural extension efforts involving losses as well as gains may face systematic resistance by farmers in low-income, high-risk environments. Promotion of technologies with downside risks – even if the upside potential is enormous – should therefore be combined with insurance or other support. We also find that even without the possibility of losses households are much more averse to risk when stakes are high. Results indicate that insurance or other support can likely be phased out. After initial successes have convinced farmers that technologies are viable, risk aversion declines. There are also significant differences in risk averting behavior between relatively poorer and wealthier farm households, which is consistent with decreasing absolute risk aversion. This suggests that as wealth is built up households are willing to take on more risk in exchange for higher returns. Both these findings suggest a strong path dependence. Efforts to develop poor rural areas through promotion of risky technologies should take this path dependence into account. Early successes are important, but households should also be allowed to build up wealth before they are challenged or tempted to take on more risky ventures. Furthermore, the finding that even without the possibility of losses households are much more risk averse when stakes are higher, suggests that agricultural extension should start modestly before asking households to take on larger gambles." from Authors' Abstract
    Keywords: experimental studies, loss aversion, risk aversion, Risk management, econometric models, Farm households,
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:fpr:ifprid:715&r=mfd
  3. By: Olivier Dagnelie; Philippe LeMay-Boucher
    Abstract: In the light of first-hand data from a Beninese urban household survey in Cotonou, we investigate several motives aiming to explain participation in Rotating Savings and Credit ASsociations. We provide anecdotal pieces of evidence, descriptive statistics, FIML regressions and matching estimates which tend to indicate that most individuals use their participation in a rosca as a device to commit themselves to save money and to deal with self-control problems.
    Keywords: ROSCA, self-control, commitment device, Benin
    JEL: G2 O16 O17
    Date: 2008–02–10
    URL: http://d.repec.org/n?u=RePEc:aub:autbar:735.08&r=mfd

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