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Microloans, education and growth

Patrick M. Emerson and Bruce McGough ()

Review of Development Economics, 2018, vol. 22, issue 4, e250-e265

Abstract: This paper constructs a two‐period overlapping generations model of human capital investment decisions where a microloan program designed to finance entrepreneurial activities is active. It is shown that, in the presence of human capital externalities, microloans that are small and have immediate repayment can be growth depressing, and welfare decreasing, through their effect on the opportunity cost of schooling. By increasing the opportunity cost of schooling, such microloans divert investment away from human capital: by failing to internalize the social returns to education, households’ individually optimal investment decisions in the face of microcredit availability act to depress the growth of the economy and result in suboptimal welfare outcomes. Conditions under which these negative effects can occur are identified and potential solutions are suggested.

Date: 2018
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