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Are Microloans Bad for Growth?

Author

Listed:
  • Emerson, Patrick M.

    (Oregon State University)

  • McGough, Bruce

    (Oregon State University)

Abstract

This paper constructs a two-period overlapping generations model of human capital investment decisions where a microloan program designed to finance entrepreneurial activities is active. It is shown that, in the presence of human capital externalities (social returns to education) there exists a range of microloan amounts that are growth depressing and welfare decreasing through their affect on the opportunity cost of schooling. By increasing the opportunity cost of schooling, microloans divert investment away from human capital: by failing to internalize the social returns to education, households’ individually optimal investment decisions in the face of microcredit availability act to depress the growth of the economy and result in sub-optimal welfare outcomes.

Suggested Citation

  • Emerson, Patrick M. & McGough, Bruce, 2010. "Are Microloans Bad for Growth?," IZA Discussion Papers 5249, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5249
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    References listed on IDEAS

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    1. Leonardo Becchetti & Pierluigi Conzo, 2014. "The effects of microfinance on child schooling: a retrospective approach," Applied Financial Economics, Taylor & Francis Journals, vol. 24(2), pages 89-106, January.
    2. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
    3. George Psacharopoulos & Harry Anthony Patrinos, 2004. "Returns to investment in education: a further update," Education Economics, Taylor & Francis Journals, vol. 12(2), pages 111-134.
    4. 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.
    5. Wydick, Bruce, 1999. "The Effect of Microenterprise Lending on Child Schooling in Guatemala," Economic Development and Cultural Change, University of Chicago Press, vol. 47(4), pages 853-869, July.
    6. Asadul Islam & Chongwoo Choe, 2013. "Child Labor And Schooling Responses To Access To Microcredit In Rural Bangladesh," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 46-61, January.
    7. Elizabeth Schroeder, 2020. "The impact of microcredit borrowing on household consumption in Bangladesh," Applied Economics, Taylor & Francis Journals, vol. 52(43), pages 4765-4779, September.
    8. Coleman, Brett E., 1999. "The impact of group lending in Northeast Thailand," Journal of Development Economics, Elsevier, vol. 60(1), pages 105-141, October.
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    Cited by:

    1. Raihan, Selim & Osmani, S.R. & Khalily, M.A. Baqui, 2017. "The macro impact of microfinance in Bangladesh: A CGE analysis," Economic Modelling, Elsevier, vol. 62(C), pages 1-15.

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    More about this item

    Keywords

    microloans; growth; human capital;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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