When Pro-Poor Microcredit Institutions Favor Richer Borrowers - A Moral Hazard Story

22 Pages Posted: 24 Feb 2021

See all articles by Sara Biancini

Sara Biancini

University of Cergy-Pontoise

Baptiste Venet

Université Paris Dauphine

David Ettinger

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

Date Written: 2021

Abstract

We suggest an explanation for the existence of “mission drift”, the tendency for Microfinance Institutions (MFIs) to lend money to wealthier borrowers rather than to the very poor. We focus on the relationship between MFIs and external funding institutions. We assume that both the MFIs and the funding institutions are pro-poor and agree on the optimal proportion of funds to be granted to the poorer borrower. However, asymmetric information on the effort chosen by the MFI to identify higher quality projects may increase the share of loans attributed to wealthier borrowers. This occurs because funding institutions have to build incentives for MFIs, creating a trade off between the quality of the funded projects and the attribution of loans to poorer borrowers.

JEL Classification: O120, O160, G210

Suggested Citation

Biancini, Sara and Venet, Baptiste and Ettinger, David, When Pro-Poor Microcredit Institutions Favor Richer Borrowers - A Moral Hazard Story (2021). CESifo Working Paper No. 8893, Available at SSRN: https://ssrn.com/abstract=3791862 or http://dx.doi.org/10.2139/ssrn.3791862

Sara Biancini (Contact Author)

University of Cergy-Pontoise ( email )

33 Boulevard du Port
Cergy-Pontoise Cedex, Cedex 95011
France

Baptiste Venet

Université Paris Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
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

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