Incentives and Competition in Microfinance

Kaniska Dam () and Prabal Roy Chowdhuri
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Prabal Roy Chowdhuri: Division of Economics, CIDE
Authors registered in the RePEc Author Service: Prabal Roy Chowdhury ()

No DTE 579, Working Papers from CIDE, División de Economía

Abstract: We develop a model of competition among socially motivated microfinance institutions (MFIs), where the MFIs offer repayment-based incentive contracts to credit agents. The agents gather information regarding a borrower, and may, or may not collude with the borrower, taking bribes in return for not acting upon their information in case of collusion. We show that competition may either increase, or decrease incentives, with incentives becoming less high powered if the MFIs are not too motivated. Further, whenever either the moral hazard problem is relatively severe and/or the MFIs are not too motivated, competition increases default, thus providing a possible explanation for the recent episodes of crisis in the MFI sector. Interestingly, the effects of competition are linked to mission drift, i.e., whether the MFIs in the concerned countries are more, or less motivated. Further, default problems may worsen in case competition is accompanied by greater access to donor funds.

Keywords: Microfinance; competition; collusion; staff incentive schemes; monitoring. (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-03
New Economics Papers: this item is included in nep-ban, nep-com, nep-cta, nep-hrm, nep-mfd and nep-mic
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