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Lending Technologies, Competition, and Consolidation in the Market for Microfinance in Bolivia

Innovations in lending technologies and market saturation have transformed La Paz, Bolivia into one of the most rapidly changing and competitive microfinance markets in the world. Two lenders stand out in this context: the pioneer BancoSol, which first entered and profitably expanded the loan market with a group liability loans, and the later entrant Caja Los Andes, which offered individual liability loans using costlier screening methods. In this paper we use a simple model of moral hazard and adverse selection to describe and analyze the nature of the competition amongst these lenders. We focus on how the terms of different loan contracts change with competition and how this affects borrowers' decisions about diligence and repayment. The hypothesized patterns of behavior are tested and shown to be consistent with empirical evidence from loan records and household survey data.

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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 213.

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Length: 40 pages
Date of creation: 01 Apr 2003
Date of revision:
Handle: RePEc:htr:hcecon:213
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  1. Navajas, Sergio & Schreiner, Mark & Meyer, Richard L. & Gonzalez-vega, Claudio & Rodriguez-meza, Jorge, 2000. "Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia," World Development, Elsevier, vol. 28(2), pages 333-346, February.
  2. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
  3. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
  4. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  5. Claudio Gonzalez-Vega & Richard L. Meyer & Sergio Navajas & Mark Schreiner & Jorge Rodriguez-Meza & Guillermo Monje, 2001. "Microfinance Market Niches and Client Profiles in Bolivia," Computational Economics 0109002, EconWPA.
  6. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  7. Kranton, Rachel E. & Swamy, Anand V., 1999. "The hazards of piecemeal reform: british civil courts and the credit market in colonial India," Journal of Development Economics, Elsevier, vol. 58(1), pages 1-24, February.
  8. Hoff, Karla & Stiglitz, Joseph E., 1998. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 55(2), pages 485-518, April.
  9. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
  10. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  11. van Tassel, Eric, 2002. "Signal Jamming in New Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 469-90, May.
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