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The Ethical Dilemma in Hybrid Organizations: A Production Function Approach to Credit Expansion in Microfinance

Author

Listed:
  • Kjetil Andersson

    (University of Agder)

  • Bert D’Espallier

    (KU Leuven)

  • Roy Mersland

    (University of Agder)

Abstract

We derive and estimate a production function for microfinance institutions to provide empirical evidence of the ethical dilemma of balancing social and financial logics in hybrid organizations. A worldwide panel dataset of microfinance institutions is utilized and a production function augmented by average loan size is estimated using the control function approach. We show how this framework can be used to quantify the tradeoff between social outreach and financial sustainability in relation to the expansion of microfinance institutions’ credit operations. The study reveals that expanding the extensive margin (increasing the number of loan clients) requires on average more than twice as many inputs as expanding the intensive margin (increasing the average loan size) to achieve the same growth in assets. Beyond the case of microfinance our production function illustrates that as hybrid organizations expand, they will inevitably face an ethical dilemma as the laws of economic efficiency exert pressure on their social missions.

Suggested Citation

  • Kjetil Andersson & Bert D’Espallier & Roy Mersland, 2025. "The Ethical Dilemma in Hybrid Organizations: A Production Function Approach to Credit Expansion in Microfinance," Journal of Business Ethics, Springer, vol. 201(2), pages 477-490, October.
    • Handle: RePEc:kap:jbuset:v:201:y:2025:i:2:d:10.1007_s10551-024-05892-9
    DOI: 10.1007/s10551-024-05892-9
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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship

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