New Economics Papers
on Microfinance
Issue of 2009‒12‒19
two papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Mutual guarantee institutions and small business finance By Francesco Columba; Leonardo Gambacorta; Paolo Emilio Mistrulli
  2. Institutions and the Allocation of Entrepreneurial Talent between Productive and Destructive Activities By Mark Sanders; Utz Weitzel

  1. By: Francesco Columba (Bank of Italy); Leonardo Gambacorta (Bank for International Settlements); Paolo Emilio Mistrulli (Bank of Italy JEL classification: D82, G21, G30, O16)
    Abstract: A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining Mutual Guarantee Institutions (MGI). Our empirical analysis shows that small firms affiliated to MGIs pay less for credit compared with similar firms. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better at screening and monitoring opaque borrowers than banks are. Thus, banks benefit from the willingness of MGIs to post collateral since this implies that firms are better screened and monitored.
    Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance
    Date: 2009–11
  2. By: Mark Sanders; Utz Weitzel
    Abstract: Entrepreneurship is generally regarded as a force of change, innovation and development in modern economies. Entrepreneurs bring new and better products to markets, restore allocative efficiency through arbitrage and reinvest their profits. However, as Baumol (1990), Mehlum et al. (2003) and Acemoglu (1995) have argued, the same energy and talent can also be allocated to unproductive ends and reduce total welfare. In this paper we present a model that analyzes the allocation of a given entrepreneurial talent over destructive and productive activities. We show that in this model two stable equilibria can emerge. As Baumol (1990) hypothesized, institutions determine the pay-offs to both types of entrepreneurial activity and hence drive this allocation. But we also show that the distribution of initial wealth and entrepreneurial talent plays a decisive role. This analysis provides a different perspective on the importance of high quality institutions in developing countries and sheds light on the situation in conflict and post-conflict countries, where both informal and formal institutions arguably have broken down. Under such circumstances, our analysis shows that micro credits can support the transition to a productive equilibrium, because they help to overcome credit contraints without creating incentives for destructive entrepreneurship.
    Keywords: growth, development, entrepreneurship, innovation, occupational choice
    JEL: O1 L26 P00
    Date: 2009–12

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