Mission Drift in Microcredit and Microfinance Institution Incentives

28 Pages Posted: 2 Mar 2017

See all articles by Sara Biancini

Sara Biancini

University of Cergy-Pontoise - THEMA

David Ettinger

CNRS, National Center for Scientific Research, France - CERAS; Université Paris Dauphine

Baptiste Venet

Université Paris Dauphine

Date Written: February 14, 2017

Abstract

We analyze the relationship between Microfinance Institutions (MFIs) and external donors, with the aim of contributing to the debate on “mission drift” in microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We first concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.

Keywords: microfinance, donors, poverty, screening

JEL Classification: O120, O160, G210

Suggested Citation

Biancini, Sara and Ettinger, David and Venet, Baptiste, Mission Drift in Microcredit and Microfinance Institution Incentives (February 14, 2017). CESifo Working Paper Series No. 6332, Available at SSRN: https://ssrn.com/abstract=2925759 or http://dx.doi.org/10.2139/ssrn.2925759

Sara Biancini (Contact Author)

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

David Ettinger

CNRS, National Center for Scientific Research, France - CERAS ( email )

28, rue des Saints-Peres
75343 Paris Cedex 07
France

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

Baptiste Venet

Université Paris Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

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