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Are Microloans Bad for Growth?

  • Emerson, Patrick M.

    ()

    (Oregon State University)

  • McGough, Bruce

    ()

    (Oregon State University)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5249.

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Length: 31 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5249
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  1. 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.
  2. Coleman, Brett E., 1999. "The impact of group lending in Northeast Thailand," Journal of Development Economics, Elsevier, vol. 60(1), pages 105-141, October.
  3. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
  4. 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.
  5. 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, 01.
  6. Psacharopoulos, George & Patrinos, Harry Anthony, 2002. "Returns to investment in education : a further update," Policy Research Working Paper Series 2881, The World Bank.
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