Microfinance and dynamic incentives ¬リニ

a r t i c l e i n f o Dynamic incentives, where incentives to repay are generated by granting access to future loans, are one of the methodologies used by microfinance institutions (MFIs). In this paper, I present a model of dynamic incentives where lenders are uncertain over how much borrowers value future loans. Loan terms are determined endoge-nously, and loans become more favorable as the probability of default becomes lower. I show that in all equilibria but one all borrowers, including the most patient ones, eventually default. I then consider an extension where borrowers can take loans from several lenders, double-dipping. Qualitatively, properties of equilibria with and without double-dipping are similar. In absolute terms, when borrowers are credit-constrained double-dipping equilibrium loans have to be more favorable to outweigh increased gains from default. As of December 2010, there were 3652 microfinance institutions (MFIs) reaching more than 200 million people, most of whom were among the poorest when they took their first loan (Maes and Reed, 2012). This is remarkable given the plethora of obstacles that, for a long time, have kept formal credit institutions away from financing the poor. Adverse selection, moral hazard, lack of collateralizable assets, absence of enforcement mechanisms, and high costs should have made microfinance nothing if non-existent, or at least subsidized. As an example , during pre-Grameen times in Bangladesh, loans targeting poor households by traditional banks had repayment rates as low as 51.6% in 1980, down to 18.8% by 1988–89, and were heavily subsidized by the government (Khalily and Meyer, 1993). The microfinance methodologies that are responsible for microcredit success are well-known in the literature. They are group lending (where a small group of neighbors is jointly liable for individual loans), dynamic incentives (using access to future loans as incentives to repay the current one), regular-repayment schedules and using collateral substitutes (Morduch, 1999). Among the four, group lending has received the most attention, as it is an innovative and clever way to alleviate the problems of adverse selection and moral hazard. More recently, however, there has been a shift in focus, away from group lending and towards other aspects of microfinance loans. Fischer and Ghatak (2010) cite several factors responsible for this change, such as a decreased reliance on group lending by several major MFIs, as well as, a growing recognition of costs associated with joint liability (see also Banerjee, 2013, and references …