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Incentives, Supervision and Regulation of Microfinance Institutions in the developing countries

  • Founanou, Mathurin
  • Ratsimalahelo, Zaka
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    We analyze the optimal regulation of a MFI that has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the MFI’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). In designing optimal contracts the regulator faces a tradeoff between inducing proper incentives for efficient MFI and costs of regulation in terms of leaving an informational rent for a high quality MFI. We identify conditions for the optimal incentive contract and show that, not surprisingly, these contracts depend on the accuracy of the supervisor’s signal, the likelihood of facing a high quality MFI, and the cost of supervision. However, since improving the accuracy of supervision is costly, even in the optimal monitoring scheme there generally exists a positive probability of MFI failure. The content of information disclosure is characterized by the optimal monitoring scheme.

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    File URL: http://mpra.ub.uni-muenchen.de/41428/1/MPRA_paper_41428.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41428.

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    Date of creation: Sep 2012
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    Handle: RePEc:pra:mprapa:41428
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    1. Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Working Papers 91-01, University of Washington, Department of Economics.
    2. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
    3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
    4. Valentina Hartarska & Denis Nadolnyak, 2007. "Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1207-1222.
    5. Giammarino, R.M. & Sappington, D.E.M., 1990. "An Incentive Approach to Banking Regulation," Papers 367, California Davis - Institute of Governmental Affairs.
    6. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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