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

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 nonprofit 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 crosssubsidization between very poor and less poor borrowers.

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Publication Type:
Working or Discussion Paper
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JEL Codes:
O16; D82; L31.
Series Statement:
CUDARE Working Paper 988

 Record created 2017-04-01, last modified 2017-04-04

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