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Competitive Microcredit Markets: Differentiation and ex-ante Incentives for Multiple Borrowing

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  • Paolo Casini

Abstract

We analyze an oligopolistic microcredit market characterized by asymmetric information and institutions that can offer only one type of contract. We study the effects of competition on contract choice when small entrepreneurs can borrow from more than one institution due to the absence of credit bureaus. We show that appropriate contract design can eliminate the ex-ante incentives for multiple borrowing. Moreover, when the market is still largely unserved and particularly risky, a screening strategy leading to contract differentiation and credit rationing is unambiguously the most effective to avoid multiple borrowing.

Suggested Citation

  • Paolo Casini, 2010. "Competitive Microcredit Markets: Differentiation and ex-ante Incentives for Multiple Borrowing," LICOS Discussion Papers 26610, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  • Handle: RePEc:lic:licosd:26610
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    File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp266.pdf
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    References listed on IDEAS

    as
    1. Alberto Bennardo & Marco Pagano & Salvatore Piccolo, 2015. "Multiple Bank Lending, Creditor Rights, and Information Sharing," Review of Finance, European Finance Association, vol. 19(2), pages 519-570.
    2. 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.
    3. Sergio Navajas & Jonathan Conning & Claudio Gonzalez-Vega, 2003. "Lending technologies, competition and consolidation in the market for microfinance in Bolivia," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 747-770.
    4. Brown, Martin & Jappelli, Tullio & Pagano, Marco, 2009. "Information sharing and credit: Firm-level evidence from transition countries," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 151-172, April.
    5. Paolo Casini, 2008. "Competition and Altruism in Microcredit Markets," Working Papers ECARES 2008_037, ULB -- Universite Libre de Bruxelles.
    6. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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    Cited by:

    1. Maitra, Pushkar & Mitra, Sandip & Mookherjee, Dilip & Motta, Alberto & Visaria, Sujata, 2017. "Financing smallholder agriculture: An experiment with agent-intermediated microloans in India," Journal of Development Economics, Elsevier, vol. 127(C), pages 306-337.
    2. Paolo Casini, 2008. "Competition and Altruism in Microcredit Markets," Working Papers ECARES 2008_037, ULB -- Universite Libre de Bruxelles.
    3. repec:eee:wdevel:v:98:y:2017:i:c:p:338-350 is not listed on IDEAS
    4. Chichaibelu, Bezawit & Waibel, Hermann, 2015. "The Interrelated Dynamics of Multiple Borrowing and Over-indebtedness among Rural Households in Thailand and Vietnam," 2015 Conference, August 9-14, 2015, Milan, Italy 211463, International Association of Agricultural Economists.

    More about this item

    Keywords

    Microfinance; Competition; Credit Bureaus; Multiple Borrowing; Credit Rationing;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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