IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Can Micro-Credit Bring Development?

  • Christian Ahlin

    (Department of Economics, Vanderbilt University)

  • Neville Jiang

    (Department of Economics, Vanderbilt University)

Registered author(s):

    We examine the long-run effects of micro-credit on development in an occupational choice model very similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. A case exists, however, in which it both lowers output per capita and raises poverty in the long run. The key to micro-credit's long-run effects is found to be the "graduation rate": the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: "winner" graduation (due to supernormal returns) and "saver" graduation (due to accumulation of normal returns). We find that "winner" graduation, however high its rate, cannot bring long-run development. In contrast, if the saving rate and normal returns in self-employment are jointly high enough, then micro-credit can bring an economy from stagnation to full development via "saver" graduation. The lasting effects of micro-credit may thus partially depend on simultaneous facilitation of micro-saving.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.accessecon.com/pubs/VUECON/vu05-w19.pdf
    File Function: First version, 2005
    Download Restriction: no

    Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 05019.

    as
    in new window

    Length:
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:van:wpaper:0519
    Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

    References listed on IDEAS
    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.:

    as in new window
    1. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
    2. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
    3. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
    4. Banerjee, Abhijit & Newman, Andrew F, 1998. "Information, the Dual Economy, and Development," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 631-53, October.
    5. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 181, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    6. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
    7. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    8. Elizabeth M. Caucutt & Krishna B. Kumar, 2004. "Evaluating Explanations for Stagnation," Development and Comp Systems 0409002, EconWPA.
    9. Joseph P. Kaboski & Robert M. Townsend, 2005. "Policies and Impact: An Analysis of Village-Level Microfinance Institutions," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 1-50, 03.
    10. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
    11. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 913, Economic Growth Center, Yale University.
    12. Kiminori Matsuyama, 2002. "On the Rise and Fall of Class Societies," CIRJE F-Series CIRJE-F-173, CIRJE, Faculty of Economics, University of Tokyo.
    13. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    14. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, June.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:van:wpaper:0519. 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: (John P. Conley)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.