| Abstract: |
We analyze the relationship between Microfinance Institutions (MFIs) and
external donors, with the aim of contributing to the debate on “mission
drift†in microfinance. We assume that both the donor and the MFI are
pro-poor, possibly at different extents. Borrowers can be (very) poor or
wealthier (but still unbanked). Incentives have to be provided to the MFI to
exert costly effort to identify the more valuable projects and to choose the
right share of poorer borrowers (the optimal level of poor outreach). We first
concentrate on hidden action. We show that asymmetric information can distort
the share of very poor borrowers reached by loans, thus increasing mission
drift. We then concentrate on hidden types, assuming that MFIs are
characterized by unobservable heterogeneity on the cost of effort. In this
case, asymmetric information does not necessarily increase the mission drift.
The incentive compatible contracts push efficient MFIs to serve a higher share
of poorer borrowers, while less efficient ones decrease their poor outreach. |