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Solidarity and Microfinance

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  • Vittoria Cerasi
  • Lucia Dalla Pellegrina

Abstract

In this paper we analyze the role of peer solidarity in fostering productive investments inthe context of microfinance. When there is asymmetric information between lenders and borrowers andloans are not collateralized, borrowers may divert loans towards current consumption rather than investingin production. We assume that solidarity is accorded by a network of individuals close enough to theborrower (peers) so as to share private information about hidden effort in the productive project. Themodel shows that peer solidarity might have contrasting effects on the effort in the productive investment.On the one hand, since solidarity transfers are contingent on the effort, they increase borrower's incentiveto invest. On the other hand, solidarity tranfers decrease the marginal utility of future consumption at theexpense of productive investment. The predictions of the model are tested on households enrolled in micro-lending programs who were surveyed in Bangladesh by the World Bank during the period 1991-1992.Empirical findings suggest a positive relationship between potential solidarity of the network of relativesand the share of loans invested in productive activities.

Suggested Citation

  • Vittoria Cerasi & Lucia Dalla Pellegrina, 2013. "Solidarity and Microfinance," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 345-366.
    • Handle: RePEc:mul:jqat1f:doi:10.1427/74921:y:2013:i:3:p:345-366
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