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

  • Paolo Casini
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    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.

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    File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp266.pdf
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    Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 26610.

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    Date of creation: 2010
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    Handle: RePEc:lic:licosd:26610
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    1. 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.
    2. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    3. Hoff, Karla & Stiglitz, Joseph E., 1997. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 52(2), pages 429-462, April.
    4. Jonathan Conning & Sergio Navajas & Claudio Gonzalez-Vega, 2003. "Lending Technologies, Competition, and Consolidation in the Market for Microfinance in Bolivia," Economics Working Paper Archive at Hunter College 213, Hunter College Department of Economics.
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