Entry of Profit-Motivated Microfinance Institutions and Borrower Welfare
Abstract
In this paper, we model welfare implications of entry of commercial micro nance institutions
(MFIs). We initially characterize equilibrium with a sole fund-constrained benevolent credit
institution followed by equilibrium with only pro t-motivated MFIs. We show that entry of
such MFIs can lead to an increase in interest and default and a decline in screening. However,
it can still represent a Pareto improvement since: all agents previously denied credit can obtain
loans, and existing clients have the option of seeking loans from MFIs. Finally, we model multiple
group formation as an equilibrium mechanism, which allows more e cient risk diversi cation.
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