The Impact of Microcredit Borrowing on Household Consumption in Bangladesh

The rapid expansion of microcredit in recent years renders knowledge of its impact on poverty critical. Unfortunately, empirical investigations have been limited by endogeneity issues. This paper suggests a strategy for handling the endogeneity of microcredit borrowing without specifying instrumental variables, allowing for estimation using observational data. The model is identified by an assumption on the conditional second moments of the errors. I find that an increase in the amount borrowed from the Grameen Bank and similar institutions in Bangladesh has a positive and significant effect on per-capita household consumption. The estimated elasticity is in the range of 0.18 to 0.21, and these parameters can be interpreted as average treatment effects. These estimates indicate that microcredit may be more effective than previously thought. JEL Classification: O16, O22, G21, C31 ∗I thank my advisor, Francis Vella, for invaluable advice and guidance; Roger Klein and Garance Genicot for helpful comments; and participants at the Association for Economic and Development Studies on Bangladesh (AEDSB). †Address: Department of Economics, 303 Ballard Hall, Oregon State University, Corvallis, OR 97331 USA. Email: [email protected]