Title

Microfinance Competition: Motivated Microlenders, Double Dipping and Default

Publication Type

Journal Article

Publication Date

12-2013

Abstract

We develop a tractable model of competition among socially motivated MFIs, so that the objective functions of the MFIs put some weight on their own clients' utility. We find that the equilibrium involves double-dipping, i.e. borrowers taking multiple loans from different MFIs, whenever the MFIs are relatively profit-oriented. Further, double-dipping necessarily leads to default and inefficiency, and moreover, borrowers who face relatively higher transactions costs optimally decide to double-dip. Interestingly, an increase in MFI competition can increase the extent of double-dipping and default. Further, the interest rates may go either way, with the interest rate likely to increase with more competition if the MFIs are very socially motivated.

Keywords

Micro-finance competition, Socially motivated MFIs, Double-dipping, Default, Subsidized credit, Interest cap

Discipline

Finance | Growth and Development

Research Areas

Applied Microeconomics

Publication

Journal of Development Economics

Volume

105

First Page

86

Last Page

102

ISSN

0304-3878

Identifier

10.1016/j.jdeveco.2013.07.006

Publisher

Elsevier

Additional URL

http://dx.doi.org/10.1016/j.jdeveco.2013.07.006

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