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Are Microloans Bad for Growth?

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  • Emerson, Patrick M.

    ()
    (Oregon State University)

  • McGough, Bruce

    ()
    (Oregon State University)

Abstract

This paper constructs a two-period overlapping generations model of human capital investment decisions where a microloan program designed to finance entrepreneurial activities is active. It is shown that, in the presence of human capital externalities (social returns to education) there exists a range of microloan amounts that are growth depressing and welfare decreasing through their affect on the opportunity cost of schooling. By increasing the opportunity cost of schooling, microloans divert investment away from human capital: by failing to internalize the social returns to education, households’ individually optimal investment decisions in the face of microcredit availability act to depress the growth of the economy and result in sub-optimal welfare outcomes.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5249.

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Length: 31 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5249

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Keywords: microloans; growth; human capital;

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References

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  1. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
  2. Leonardo Becchetti & Pierluigi Conzo, 2010. "The controversial effects of microfinance on child schooling: A retrospective approach," Working Papers 173, ECINEQ, Society for the Study of Economic Inequality.
  3. Coleman, Brett E., 1999. "The impact of group lending in Northeast Thailand," Journal of Development Economics, Elsevier, vol. 60(1), pages 105-141, October.
  4. Islam, Asadul & Choe, Chongwoo, 2009. "Child Labour and Schooling Responses to Access to Microcredit in Rural Bangladesh," MPRA Paper 16842, University Library of Munich, Germany.
  5. George Psacharopoulos & Harry Anthony Patrinos, 2004. "Returns to investment in education: a further update," Education Economics, Taylor & Francis Journals, vol. 12(2), pages 111-134.
  6. Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
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