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Learning and Microlending

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  • Drugov, Mikhail
  • Macchiavello, Rocco

Abstract

For many self-employed poor in the developing world, entrepreneurship involves experimenting with new technologies and learning about oneself. This paper explores the (positive and normative) implications of learning for the practice of lending to the poor. The optimal lending contract rationalizes several common aspects of microlending schemes, such as "mandatory saving requirements", "progressive lending" and "group funds". Joint liability contracts are, however, not necessarily optimal. Among the poorest borrowers the model predicts excessively high retention rates, the contemporaneous holding of borrowing and savings at unfavorable interest rates as well as the failure to undertake profitable and easily available investment opportunities, such as accepting larger loans to scale-up business. Further testable predictions can be used to interpret and guide the design of controlled field experiments to evaluate microlending schemes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7011.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7011

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Related research

Keywords: Credit Constraints; Group Lending; Microlending Schemes; Savings; Scaling-Up; Self-Discovery;

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References

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  20. Suresh de Mel & David McKenzie & Christopher Woodruff, 2010. "Who are the Microenterprise Owners? Evidence from Sri Lanka on Tokman versus De Soto," NBER Chapters, in: International Differences in Entrepreneurship, pages 63-87 National Bureau of Economic Research, Inc.
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