(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance

Abhijit Banerjee and Esther Duflo

No 10146, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate the puzzle of microfinance: that loans generate large measured returns for businesses, yet loan take-up is low and the businesses often close. We analyze a randomized trial that bundled microfinance loans with a cheap health insurance policy. Requiring clients to purchase insurance substantially lowered loan renewal. The insurance was useless, due to administrative failures, but reduced loan renewal negatively impacted clients? businesses. Clients' decision to incur substantial business losses, rather than pay modest insurance premiums, implies the substantial financial gains from microfinance loans are dissipated by unmeasured costs and provide little net value to microfinance clients.

Keywords: Development; Health insurance; Microcredit; Microenterprises; Microfinance; Revealed preference; Welfare (search for similar items in EconPapers)
JEL-codes: O12 O16 O19 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-dev, nep-exp, nep-ias and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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