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Mission Drift in Microcredit and Microfinance Institution Incentives

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  • Sara Biancini
  • David Ettinger
  • Baptiste Venet

Abstract

We analyze the relationship between Microfinance Institutions (MFIs) and external donors, with the aim of contributing to the debate on “mission drift” in microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We first concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.

Suggested Citation

  • Sara Biancini & David Ettinger & Baptiste Venet, 2017. "Mission Drift in Microcredit and Microfinance Institution Incentives," CESifo Working Paper Series 6332, CESifo.
    • Handle: RePEc:ces:ceswps:_6332
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    References listed on IDEAS

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    Cited by:

    1. Md Aslam Mia & Lucia Dalla Pellegrina & Cheng Zhang & Sunil Sangwan, 2022. "Efficiency Wage and Productivity in the Indian Microfinance Industry: A Panel Evidence," IIM Kozhikode Society & Management Review, , vol. 11(2), pages 235-252, July.

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    More about this item

    Keywords

    microfinance; donors; poverty; screening;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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