Mission Drift in Microcredit: A Contract Theory Approach

Sara Biancini, David Ettinger () and Baptiste Venet
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David Ettinger: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres
Baptiste Venet: LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, DIAL - Développement, institutions et analyses de long terme, Institut de Recherche pour le Développement (IRD)

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Abstract: We analyze the relationship between Microfinance Institutions (MFIs) and external funding institutions, with the aim of contributing to the debate on "mission drift" (the tendencyfor MFIs to lend money to wealthier borrower rather than to the very poor). We suggestthat funding institutions build incentives for MFIs to choose the adequate share of poorerborrowers and to exert effort to increase the quality of the funded projects. We show thatasymmetric information on both the effort level and its cost may increase the share of richerborrowers. However the unobservability of the cost of effort has an ambiguous effect. Itpushes efficient MFIs to serve a higher share of poorer borrowers, while less efficient onesdecrease their poor outreach.

Keywords: Microfinance; Funding Institutions; Mission Drift; Contract Theory (search for similar items in EconPapers)
Date: 2019-10-03
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mic
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