The Microfinance Disappointment: An Explanation Based on Risk Aversion

32 Pages Posted: 29 Jan 2018

See all articles by Alexey Khazanov

Alexey Khazanov

Boston College

Omer Moav

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics

Hosny Zoabi

New Economic School (NES)

Date Written: January 2018

Abstract

Recent research indicates that microcredit has not contributed significantly to poverty reduction. Take up of affordable credit by the poor for investment in businesses, education and health, turned out to be very low. We argue that this can be explained by risk aversion, when investment affects the probability of success of a risky project. Our model abstracts from fixed costs in the production technology, commonly assumed in the existing literature. There are no imperfections in the loan market, and we abstract from assumptions about false beliefs by the poor regarding the production function or other behavioral assumptions. We conclude that to facilitate investment and thereby reduce poverty, policy should be aimed at reducing the risk faced by the poor.

Suggested Citation

Khazanov, Alexey and Moav, Omer and Neeman, Zvika and Zoabi, Hosny, The Microfinance Disappointment: An Explanation Based on Risk Aversion (January 2018). CEPR Discussion Paper No. DP12659. Available at SSRN: https://ssrn.com/abstract=3112285

Alexey Khazanov (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Omer Moav

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/moav

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~zvika/

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-3184 (Phone)
617-353-4449 (Fax)

Hosny Zoabi

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

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