(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance

35 Pages Posted: 25 Sep 2014

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Richard Hornbeck

University of Chicago - Booth School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 2014

Abstract

We investigate the puzzle of microfinance: that loans generate large measured returns for businesses, yet loan take-up is low and the businesses often close. We analyze a randomized trial that bundled microfinance loans with a cheap health insurance policy. Requiring clients to purchase insurance substantially lowered loan renewal. The insurance was useless, due to administrative failures, but reduced loan renewal negatively impacted clients' businesses. Clients' decision to incur substantial business losses, rather than pay modest insurance premiums, implies the substantial financial gains from microfinance loans are dissipated by unmeasured costs and provide little net value to microfinance clients.

Keywords: development, health insurance, microcredit, microenterprises, microfinance, revealed preference, welfare

JEL Classification: O12, O16, O19

Suggested Citation

Banerjee, Abhijit V. and Duflo, Esther and Hornbeck, Richard, (Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance (September 2014). CEPR Discussion Paper No. DP10146. Available at SSRN: https://ssrn.com/abstract=2501629

Abhijit V. Banerjee (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

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United States

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR)

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United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

Richard Hornbeck

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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