nep-mfd New Economics Papers
on Microfinance
Issue of 2023‒04‒17
two papers chosen by
Aastha Pudasainee and

  1. At the Right Time:Eliminating Mismatch between Cash Flow and Credit Flow in Microcredit By Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
  2. Does social trust determine social progress? Evidence for the European regions By Jesús Peiró-Palomino; Lisa Gianmoena; Andrés J. Picazo-Tadeo; Vicente Ríos

  1. By: Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
    Abstract: Despite the expansion of microcredit access, its outreach is still limited among farmers. One potential cause is a timing mismatch between cash flow and credit flow. Farmers have little income until their harvest is realized, while standard microcredit requires weekly installment payments. This mismatch causes underinvestment and borrowing for repayment, resulting in lower uptake rates. Furthermore, agricultural investment is sequential, while credit is disbursed as a lump sum. Present-biased (PB) farmers may fail to set aside sufficient money for later investment. To test these predictions, we conducted a randomized control trial modifying standard microcredit targeted at tenant farmers by setting repayment schedules to one-time repayment after harvest and making loan disbursement sequential. Discarding weekly repayment increased uptake and borrower’s satisfaction without worsening repayment rates. Sequential disbursement increased later investments among PB borrowers and reduced loan sizes. We attribute the loan size reduction to the option value: Sequential disbursement allowed borrowers to adjust the total loan size after observing credit demand shocks, eliminating the need for precautionary borrowing. Calibrated models are used to evaluate counterfactual credit designs, showing that letting borrowers set the credit limit is beneficial for PB borrowers, while credit lines will be suboptimal for PB borrowers.
    Keywords: Microcredit; Timing mismatch, Commitment; Option value; Precautionary borrowing
    JEL: G21 O16 Q14
    Date: 2023–03
  2. By: Jesús Peiró-Palomino (Universiy of Valencia and INTECO); Lisa Gianmoena (University of Pisa); Andrés J. Picazo-Tadeo (Universiy of Valencia and INTECO); Vicente Ríos (Universiy of Pisa)
    Abstract: Social trust is a heavily rooted element whose positive impact on economic performance has been widely corroborated for many contexts. However, the understanding of social progress disparities in aspects other than income is attracting increasing attention and is a key goal for the European Commission. European regions present notable disparities in many non-economic aspects that characterize advanced societies such as personal rights, freedom, tolerance and inclusion and access to advanced education. This paper provides fresh evidence on the impact of social trust on a wide array of aspects categorized as advanced features of social progress in the framework of the European Social Progress Index 2020 (EU-SPI). The results show a positive impact of social trust on most of the indicators, which is robust to endogeneity issues. These insights help to understand the enormous differences in terms of social progress across European regions and provide useful information for the design of future policies that pursue a more equal Europe.
    Keywords: European regions; European Social Progress Index; Social trust
    JEL: R11 Z10
    Date: 2023–04

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