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Creating Incentives for Micro-Credit Agents to Lend to the Poor

  • Aubert, Cecile
  • de Janvry, Alain
  • Sadoulet, Elisabeth

Microfinance institutions (MFIs) have introduced incentive pay schemes for their credit agents to induce information acquisition on borrowers. Bonuses linked to repayment are efficient for profit-oriented MFIs but insufficient for non-profit MFIs trying to reach very poor borrowers, when repayment and wealth are positively correlated. We show that no incentive scheme is consistent with this (non-verifiable) objective: Random audits on the share of very poor borrowers selected by the agent become necessary. Under the optimal contract, non-profit MFIs generally maximize the number of poor borrowers it services by cross-subsidization between very poor and less poor borrowers.

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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt4d340033.

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Date of creation: 01 Jun 2004
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Handle: RePEc:cdl:agrebk:qt4d340033
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