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Solidarity Behind Microfinance

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Author Info

  • Vittoria Cerasi

    ()
    (Department of Statistics, Università degli Studi di Milano-Bicocca)

  • Lucia Dalla Pellegrina

    ()
    (Department of Statistics, Università degli Studi di Milano-Bicocca)

Abstract

In this paper we analyse the role of peers' solidarity in fostering investment in production in the context of micro?nance. When there is asymmetric information between lenders and borrowers on the use of borrowed funds and loans are not collateralized, there is a high chance that borrowers use loans for current consumption sacrifying productive projects. We study the effect of solidarity in the form of insurance from a network of relatives on borrowers' intertemporal preference for consumption and its impact on myopic behavior. The main result of the model is that solidarity might increase the share of funds devoted to investment but it might also reduce the amount of the loan in equilibrium. This result is in accordance with several features of micro-lending. We test the model using survey data from the World Bank on a sample of households in Bangladesh during the period 1991-1992. Empirical fi?ndings support the predictions of the model.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20091101.pdf
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Bibliographic Info

Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20091101.

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Length: 29 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:mis:wpaper:20091101

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Related research

Keywords: Microfinance; credit rationing; social networks;

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References

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  1. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
  2. Nidhiya Menon, 2004. "Consumption Smoothing in Micro Credit Programs," Development and Comp Systems 0403005, EconWPA.
  3. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," Working Papers 182, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  4. Alexander S. Kritikos & Denitsa Vigenina, 2005. "Key Factors of Joint-Liability Loan Contracts: An Empirical Analysis," Kyklos, Wiley Blackwell, vol. 58(2), pages 213-238, 04.
  5. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
  6. Jackson, Cecile, 1996. "Rescuing gender from the poverty trap," World Development, Elsevier, vol. 24(3), pages 489-504, March.
  7. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
  8. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
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