Solidarity and Microfinance

Posted: 18 Dec 2013

See all articles by Vittoria Cerasi

Vittoria Cerasi

Bicocca University - Department of Economics, Management & Statistics (DEMS)

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Date Written: December 2013

Abstract

In this paper we analyze the role of peer solidarity in fostering productive investments in the context of microfinance. When there is asymmetric information between lenders and borrowers and loans are not collateralized, borrowers may divert loans towards current consumption rather than investing in production. We assume that solidarity is accorded by a network of individuals close enough to the borrower (peers) so as to share private information about hidden effort in the productive project. The model shows that peer solidarity might have contrasting effects on the effort in the productive investment. On the one hand, since solidarity transfers are contingent on the effort, they increase borrower’s incentive to invest. On the other hand, solidarity tranfers decrease the marginal utility of future consumption at the expense of productive investment. The predictions of the model are tested on households enrolled in micro-lending programs who were surveyed in Bangladesh by the World Bank during the period 1991-1992.

Empirical findings suggest a positive relationship between potential solidarity of the network of relatives and the share of loans invested in productive activities.

Keywords: Microfinance, Social Networks, Intertemporal Consumption

JEL Classification: O16, G21

Suggested Citation

Cerasi, Vittoria and Dalla Pellegrina, Lucia, Solidarity and Microfinance (December 2013). Rivista Italiana degli Economisti, Vol. 3, December 2013. Available at SSRN: https://ssrn.com/abstract=2368800

Vittoria Cerasi (Contact Author)

Bicocca University - Department of Economics, Management & Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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