Solidarity Behind Microfinance
In this paper we analyse the role of peers' solidarity in fostering investment in production in the context of micro?nance. When there is asymmetric information between lenders and borrowers on the use of borrowed funds and loans are not collateralized, there is a high chance that borrowers use loans for current consumption sacrifying productive projects. We study the effect of solidarity in the form of insurance from a network of relatives on borrowers' intertemporal preference for consumption and its impact on myopic behavior. The main result of the model is that solidarity might increase the share of funds devoted to investment but it might also reduce the amount of the loan in equilibrium. This result is in accordance with several features of micro-lending. We test the model using survey data from the World Bank on a sample of households in Bangladesh during the period 1991-1992. Empirical fi?ndings support the predictions of the model.
|Date of creation:||Nov 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.statistica.unimib.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jackson, Cecile, 1996. "Rescuing gender from the poverty trap," World Development, Elsevier, vol. 24(3), pages 489-504, March.
- Dean S. Karlan, 2005.
"Using Experimental Economics to Measure Social Capital and Predict Financial Decisions,"
American Economic Review,
American Economic Association, vol. 95(5), pages 1688-1699, December.
- Dean Karlan, 2004. "Using experimental economics to measure social capital and predict financial decisions," Artefactual Field Experiments 00074, The Field Experiments Website.
- Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," Working Papers 182, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
- Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
- Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
- Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
- Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital And Predict Financial Decisions," Working Papers 909, Economic Growth Center, Yale University.
- Kritikos, Alexander S. & Vigenina, Denitsa, 2005.
"Key Factors of Joint-Liability Loan Contracts: An Empirical Analysis,"
231, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- Alexander S. Kritikos & Denitsa Vigenina, 2005. "Key Factors of Joint-Liability Loan Contracts: An Empirical Analysis," Kyklos, Wiley Blackwell, vol. 58(2), pages 213-238, 04.
- Nidhiya Menon, 2004. "Consumption Smoothing in Micro Credit Programs," Development and Comp Systems 0403005, EconWPA.
- Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
- Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
When requesting a correction, please mention this item's handle: RePEc:mis:wpaper:20091101. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matteo Pelagatti)
If references are entirely missing, you can add them using this form.