Creating Incentives for Micro-Credit Agents to Lend to the Poor

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Creating Incentives for Micro-Credit Agents to Lend to the Poor

Author Info

Cecile Aubert (Universite Paris Dauphine)
Alain de Janvry (University of California, Berkeley)
Elisabeth Sadoulet (University of California, Berkeley)

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Cécile Aubert

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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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number 988.

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Date of creation: 01 Jun 2004
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Handle: RePEc:cdl:agrebk:988

Note: oai:cdlib1:are_ucb-1077
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This paper has been announced in the following NEP Reports:

NEP-AGR-2005-05-07 (Agricultural Economics)
NEP-ALL-2005-05-07 (All new papers)
NEP-MFD-2005-05-07 (Microfinance)

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Lewis, Tracy R & Sappington, David E M, 2001. "Optimal Contracting with Private Knowledge of Wealth and Ability," Review of Economic Studies, Blackwell Publishing, vol. 68(1), pages 21-44, January.
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Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June. [Downloadable!] (restricted)
Other versions:
- Besley, Timothy J. & Ghatak, Maitreesh, 2004. "Competition and Incentives with Motivated Agents," CEPR Discussion Papers 4641, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Amin, Sajeda & Rai, Ashok S. & Topa, Giorgio, 2003. "Does microcredit reach the poor and vulnerable? Evidence from northern Bangladesh," Journal of Development Economics, Elsevier, vol. 70(1), pages 59-82, February. [Downloadable!] (restricted)
Other versions:
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Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)

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