Creating Incentives for Micro-Credit Agents to Lend to the Poor

Cécile AUBERT (), Alain de Janvry and Elisabeth Sadoulet
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Alain de Janvry: University of California, Berkeley
Elisabeth Sadoulet: University of California, Berkeley

No 988, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: Microfinance institutions (MFIs) have introduced incentive pay schemes for their credit agents to induce information acquisition on borrowers. Bonuses linked to repayment are efficient for profit-oriented MFIs but insufficient for non-profit MFIs trying to reach very poor borrowers, when repayment and wealth are positively correlated. We show that no incentive scheme is consistent with this (non-verifiable) objective: Random audits on the share of very poor borrowers selected by the agent become necessary. Under the optimal contract, non-profit MFIs generally maximize the number of poor borrowers it services by cross-subsidization between very poor and less poor borrowers.

Keywords: micro-credit; pro-poor objectives; incentives (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-mfd
Date: 2004-06-01
Note: oai:cdlib1:are_ucb-1077
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