Microfinance subsidies and local externalities

Authors: Leonardo Becchetti Fabio Pisani

Publish Date: 2008/06/18

Volume: 34, Issue: 3, Pages: 309-321

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Abstract

We analyse equilibrium borrowers’ effort and the cost of microcredit loans in the presence of moral hazard project correlation and subsidies under group lending conditions Our results show that under the assumption of endogenous effort project correlation has significant effects on borrowers’ effort only when it is determined by asymmetric positive or negative shocks These findings indicate that the wellknown negative effect of withingroup symmetric project correlation on group lending with joint liability disappears once endogenous effort is taken into account We also analyse the effects of subsidised lending and asymmetric correlation on the relative convenience in terms of borrowers’ effort of the alternative 1 between group lending and individual lending with notional collateral and 2 among three different market structures of the microfinance industry

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