Microfinance and Missing Markets

34 Pages Posted: 21 Jul 2007  

M. Shahe Emran

George Washington University - Department of Economics

A. K. M. Mahbub Morshed

affiliation not provided to SSRN

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: March 2007

Abstract

The existing theoretical analysis of microfinance focuses on the nature of the loan contracts that mitigates the pervasive problems of moral hazard and adverse selection in the absence of physical collateral. We depart from the existing literature and draw attention to the role of missing or imperfect labor market in understanding some of the important 'second generation' puzzles and debates in the microfinance movement. Our analysis shows that a focus on the labor market helps explain a number puzzling aspects of microfinance in developing countries like (i) credit-worthiness of poor women borrowers facing very high interest rates, (ii) the microentrepreneurs unwillingness or inability to scale up their economic activity, (iii) conflicting views about interest rate elasticity of demand for microcredit (i.e., a zero elasticity according to practitioners, but a significant negative elasticity according to econometric estimate). The analysis has important implications for the appropriate role of microcredit in the long-run development of a developing economy.

Keywords: Microfinance, Microcredit, Puzzles, High Interest Rate, Labor Market, Missing Markets

JEL Classification: O12, O16, J23, J43, D13, D 52

Suggested Citation

Shahe Emran, M. and Morshed, A. K. M. Mahbub and Stiglitz, Joseph E., Microfinance and Missing Markets (March 2007). Available at SSRN: https://ssrn.com/abstract=1001309 or http://dx.doi.org/10.2139/ssrn.1001309

M. Shahe Emran (Contact Author)

George Washington University - Department of Economics ( email )

2115 G Street NW
302 Monroe Hall
Washington, DC 20052
United States

A. K. M. Mahbub Morshed

affiliation not provided to SSRN

No Address Available

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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