The impact of microcredit borrowing on household consumption in Bangladesh

Elizabeth Schroeder

Applied Economics, 2020, vol. 52, issue 43, 4765-4779

Abstract: The rapid expansion of microcredit in recent years renders knowledge of its impact on poverty critical. Unfortunately, empirical investigations have been limited by endogeneity issues, and randomized controlled trials suffer from a lack of power. This article suggests a strategy for handling the endogeneity of microcredit borrowing without specifying instrumental variables, allowing for estimation using observational data. The model is identified by an assumption on the conditional second moments of the errors and estimated semiparametrically. I find that an increase in the amount borrowed from the Grameen Bank and similar institutions in Bangladesh has a positive and significant effect on per-capita household consumption. The estimated elasticity is in the range of 0.18 to 0.21. These estimates indicate that microcredit may be more effective than previously thought.

Date: 2020
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DOI: 10.1080/00036846.2020.1743815

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