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Creating incentives for micro-credit agents to lend to the poor

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Author Info

  • Aubert, Cecile
  • de Janvry, Alain

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

  • Sadoulet, Elisabeth

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

Abstract

Microfinance institutions (MFIs) have introduced incentive pay schemes for their credit agents to induce information acquisition on borrowers. Bonuses linked to repayment are efficient for profit-oriented MFIs but insufficient for non-profit MFIs trying to reach very poor borrowers, when repayment and wealth are positively correlated. We show that no incentive scheme is consistent with this (non-verifiable) objective: Random audits on the share of very poor borrowers selected by the agent become necessary. Under the optimal contract, non-profit MFIs generally maximize the number of poor borrowers it services by cross-subsidization between very poor and less poor borrowers.

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 0988.

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Length: 35 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:are:cudare:0988

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Keywords: banks and banking; credit; microeconomics; microfinance;

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