Learning and Microlending

Mikhail Drugov and Rocco Macchiavello

No 7011, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: For many self-employed poor in the developing world, entrepreneurship involves experimenting with new technologies and learning about oneself. This paper explores the (positive and normative) implications of learning for the practice of lending to the poor. The optimal lending contract rationalizes several common aspects of microlending schemes, such as "mandatory saving requirements", "progressive lending" and "group funds". Joint liability contracts are, however, not necessarily optimal. Among the poorest borrowers the model predicts excessively high retention rates, the contemporaneous holding of borrowing and savings at unfavorable interest rates as well as the failure to undertake profitable and easily available investment opportunities, such as accepting larger loans to scale-up business. Further testable predictions can be used to interpret and guide the design of controlled field experiments to evaluate microlending schemes.

Keywords: Credit constraints; Group lending; Microlending schemes; Savings; Scaling-up; Self-discovery (search for similar items in EconPapers)
JEL-codes: D14 O14 O16 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cta, nep-ent and nep-mfd
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