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Does Anti-Diversification Pay? A One-Sided Matching Model of Microcredit

Listed author(s):
  • Thilo Klein

In many economic situations, market participation requires that agents form groups subject to exogenous rules. Consider a microfinance institution that decides on rules for diversifying borrower groups in terms of their exposure to income shocks. Such rules affect group repayment by influencing both who matches with whom (direct effect) and who participates in the market (participation). I develop the key trade-off for conflicting predictions of extant theoretical models and estimate both effects separately. Group formation creates an endogeneity problem, but a matching model exploits the exogenous variation from counterfactual groups. I find that while diversification has no participation effect it has a significant positive direct effect.

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File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1521.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1521.

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Date of creation: 19 Jul 2015
Handle: RePEc:cam:camdae:1521
Contact details of provider: Web page: http://www.econ.cam.ac.uk/

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