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On the Efficiency Effects of Subsidies in Microfinance: An Empirical Inquiry

  • Hudon, Marek
  • Traca, Daniel

Summary Using an original database of rating agencies, this paper gives empirical evidence on the impact of subsidy intensity on the efficiency of Microfinance Institutions (MFIs). We find that subsidies have had a positive impact on efficiency, in the sense that MFIs that received subsidies are more efficient than those that do not. However, we find also that subsidization beyond a certain threshold renders the marginal effect on efficiency negative. In our sample, 26% of MFIs receive levels of subsidization higher than that threshold, which implies that a marginal cut on subsidy intensity would increase their efficiency.

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Article provided by Elsevier in its journal World Development.

Volume (Year): 39 (2011)
Issue (Month): 6 (June)
Pages: 966-973

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Handle: RePEc:eee:wdevel:v:39:y:2011:i:6:p:966-973
Contact details of provider: Web page: http://www.elsevier.com/locate/worlddev

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  1. Roy Mersland & Reidar Øystein Str�m, 2008. "Performance and trade-offs in Microfinance Organisations-does ownership matter?," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(5), pages 598-612.
  2. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  3. Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
  4. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  5. Patrick Honohan, 2004. "Financial Sector Policy and the Poor : Selected Findings and Issues," World Bank Publications, The World Bank, number 14874, June.
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  7. Colin Rowat & Paul Seabright, 2004. "Intermediation by aid agencies," Industrial Organization 0412007, EconWPA.
  8. Morduch, J., 1998. "The Microfinance Schism," Papers 626, Harvard - Institute for International Development.
  9. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages F107-F133, 02.
  10. Lapenu, Cécile, 2000. "The role of the state in promoting microfinance institutions," FCND briefs 89, International Food Policy Research Institute (IFPRI).
  11. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, vol. 60(1), pages 229-248, October.
  12. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
  13. International Monetary Fund, 2002. "Microfinance Institutions and Public Policy," IMF Working Papers 02/159, International Monetary Fund.
  14. Lapenu, Cécile, 2000. "The role of the state in promoting microfinance institutions," FCND discussion papers 89, International Food Policy Research Institute (IFPRI).
  15. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  16. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  17. Zeller, Manfred & Meyer, Richard L., 2002. "The triangle of microfinance," Food policy statements 40, International Food Policy Research Institute (IFPRI).
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