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(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance

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  • Banerjee, Abhijit
  • Duflo, Esther
  • Hornbeck, Richard

Abstract

We investigate the puzzle of microfinance: that loans generate large measured returns for businesses, yet loan take-up is low and the businesses often close. We analyze a randomized trial that bundled microfinance loans with a cheap health insurance policy. Requiring clients to purchase insurance substantially lowered loan renewal. The insurance was useless, due to administrative failures, but reduced loan renewal negatively impacted clients’ businesses. Clients' decision to incur substantial business losses, rather than pay modest insurance premiums, implies the substantial financial gains from microfinance loans are dissipated by unmeasured costs and provide little net value to microfinance clients.

Suggested Citation

  • Banerjee, Abhijit & Duflo, Esther & Hornbeck, Richard, 2014. "(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance," CEPR Discussion Papers 10146, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10146
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    References listed on IDEAS

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    1. Alessandro Tarozzi & Jaikishan Desai & Kristin Johnson, 2015. "The Impacts of Microcredit: Evidence from Ethiopia," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 54-89, January.
    2. Abhijit Banerjee & Esther Duflo & Richard Hornbeck, 2014. "Bundling Health Insurance and Microfinance in India: There Cannot Be Adverse Selection If There Is No Demand," American Economic Review, American Economic Association, vol. 104(5), pages 291-297, May.
    3. Dow, W & Gertly, P & Schoeni, R-F & Strauss, J & Thomas, D, 1997. "Health Care Prices, Health and Labor Outcomes : Experimental Evidence," Papers 97-01, RAND - Labor and Population Program.
    4. Rebecca L. Thornton & Laurel E. Hatt & Erica M. Field & Mursaleena Islam & Freddy Solís Diaz & Martha Azucena González, 2010. "Social security health insurance for the informal sector in Nicaragua: a randomized evaluation," Health Economics, John Wiley & Sons, Ltd., vol. 19(S1), pages 181-206, September.
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    Cited by:

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    2. Neuberger, Doris, 2015. "Financial Inclusion, Regulation, and Education in Germany," ADBI Working Papers 530, Asian Development Bank Institute.
    3. Craig McIntosh & Felix Povel & Elisabeth Sadoulet, 2019. "Utility, Risk and Demand for Incomplete Insurance: Lab Experiments with Guatemalan Co-Operatives," Economic Journal, Royal Economic Society, vol. 129(622), pages 2581-2607.
    4. Marie-Catherine Riekhof, 2016. "The Insurance Premium in the Interest Rates of Interlinked Loans in a Small-scale Fishery," CER-ETH Economics working paper series 16/264, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    5. Visser, Martine & Jumare, Hafsah & Brick, Kerri, 2020. "Risk preferences and poverty traps in the uptake of credit and insurance amongst small-scale farmers in South Africa," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 826-836.
    6. Gallenstein, Richard & Flatnes, Jon Einar & Dougherty, John & Mishra, Khushbu & Miranda, Mario & Sam, Abdoul, 2017. "The Impact of Index Insurance and Joint Liability on Borrowing and Risk Taking among Smallholder Farmers: Evidence from a Framed Field Experiment in Tanzania," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259210, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    development; health insurance; microcredit; microenterprises; microfinance; revealed preference; welfare;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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