peer group formation in an adverse selection model this paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification or auditing by banks is costly peer group formation reduces interest rates due to a collateral effect namely cross subsidisation amongst borrowers acts as collateral behind a loan by uncovering such a collateral effect this paper shows that peer group systems can be viewed as an effective risk pooling mechanism and thus enhance efficiency notjust in the full information set up a well known family of adverse selection models in the stiglitz and weiss 1981 tradition demonstrates that when banks are imperfectly informed about the riskiness of borrowers projects and therefore cannot discriminate against risky borrowers interest rates become inefficiently high and worthy borrowers are driven out of the credit market the extent of this problem is substantially magnified when borrowers do not have adequate collateral to secure a loan typically adverse selection combined with lack of collateral leads to prohibitively high interest rates poorly endowed individuals e g students immigrants the unemployed and a vast majority of poor individuals in developing countries often face such high rates and therefore cannot take advantage of profitable investment opportunities a peer group formation system represents a possible solution to the above problem under this system a bank lends to borrowers without collateral on condition that the borrowers organise themselves into groups and that participant borrowers within each group accept to take joint responsibility for a loan thus in addition to repaying their own share of the loan each group member must accept to repay the obligations of their defaulting peers otherwise the entire group is denied access to future refinancing systems of this kind have been very successful in practice they have generated lower interest rates for the rural poor in for example bangladesh the philippines bolivia and the state of arkansas in the united states moreover group lending has also been successfully implemented in large urban areas such in the cities of dhaka and chicago 1

the microfinance promise in the past decade microfinance programs have demonstrated that it is possible to lend to low income households while maintaining high repayment rates even without requiring collateral the programs promise a revolution in approaches to alleviating poverty and spreading financial services and millions of poor households are served globally a growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success particularly the use of group lending contracts with joint liability for the most part however high repayment rates have not translated into profits and studies of impacts on poverty yield a mixed picture in describing emerging tensions the paper highlights the diversity of innovative mechanisms beyond group lending contracts the measurement of financial sustainability the estimation of economic and social impacts the costs and benefits of subsidization and the potential to reduce poverty through savings programs rather than just credit the promise of microfinance has pushed far ahead of the evidence and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion

group lending repayment incentives and social collateral abstract in this paper we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment this type of scheme especially in the guise of the grameen bank in bangladesh has received increasing attention we set up and analyze the repayment game which group lending gives rise to our analysis suggests that such schemes have both positive and negative effects on repayment rates the positive effect is that successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient return to make repayment worthwhile the negative effect arises when the whole group defaults even when some members would have repaid under individual lending we also show how group lending may harness social collateral which serves to mitigate its negative effect

productivity and financial sector policies evidence from south east asia this paper uses primary data collected from the central bank reports to examine the influence of financial sector policies on the average productivity of capital in five south east asian economies the data include measures of repressionist policies encompassing interest rate controls directed credit programmes and reserve and liquidity requirements we use time series techniques to examine whether these policies have a statistically significant influence on the average productivity of capital conditioning on variables suggested by economic theory these policies are found to have a significant negative effect on productivity in most cases with the important exception of south korea for which we find significant positive effects

hitting the jackpot product proliferation by multiproduct firms under uncertainty this paper presents a model of product proliferation by multiproduct firms under uncertainty firms introduce new differentiated products because they want to hit as many jackpots as possible products with high profits and long lives there is uncertainty about the success of new products as the probability of hitting a jackpot increases product proliferation increases more products are introduced and expected in equilibrium the expected number of products in equilibrium is always less than at the optimum but in industries with multiple firms as the probability of hitting a jackpot increases rivalry intensifies and that gap shrinks

assessing the case for social experiments rs ecent academic debates pit two alternative approaches to policy evaluation against one another the first is the experimental approach based on the random assignment of accepted program applicants to a recipient or treatment group and a non recipient or control group the second is the nonexperimental or econometric approach that uses a variety of microdata sources statistical methods and behavioral models to compare the outcomes of participants in social programs with those of nonparticipants the central question addressed in this paper is whether or not randomized social experiments aid in securing answers to basic questions about the evaluation of social programs there are many distinct and complementary approaches to the study of the impact of public policy including full general equilibrium analysis of policy impacts tinbergen 1956 auerbach and kotlikoff 1987 shoven and whalley 1992 kydland and prescott 1991 and less ambitious partial equilibrium microeconomic structural research programs such as those designed to estimate the impact of taxes on labor supply both approaches offer answers to many interesting counterfactual policy questions but their credibility rests critically on the quality of the empirical input used to generate their answers

the empirics of microfinance what do we know microfinance has received a lot of attention recently both from policy makers as well as in academic circles two of the main topics that have been hotly debated are explaining joint liability group lending and its implications for reducing information asymmetries and the trade off between the financial sustainability and outreach of microfinance programmes this feature contains three novel empirical contributions providing new insights with respect to why and how joint liability group lending works it also contains the first large scale systematic analysis of the trade off between financial performance and outreach of microfinance institutions

the role of subsidies in microfinance evidence from the grameen bank the grameen bank of bangladesh has been in the vanguard of the microfinance movement showing the potential to alleviate poverty by providing credit to poor house holds part of this success has been built on subsidies in 1996 for example total subsidies evaluated at the economic opportunity cost of capital amounted to about us 26 30 million the evidence helps to explain why institutions like grameen have not just sprung up on their own as private commercial ventures and it underscores the value of openly addressing the costs and benefits of subsidization the paper also describes recent difficulties in maintaining high repayment rates q 1999 elsevier science b v all rights reserved

state intervention and the microcredit market the role of business development services we analyze in this paper how various forms of state intervention can impact microfinance institutions lending behavior using a simple model where entrepreneurs receive individual uncollateralized loans we show that not surprisingly state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan however after modeling business development services bds provided by the microfinance institution we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services we therefore analyze an alternative policy bds subsidization we show that if bds are efficient enough and are targeted toward less performing borrowers then for fixed government expenditures such subsidies do better in terms of financial inclusion than the loan guarantee moreover we argue that under similar conditions bds subsidization alone does better in terms of financial inclusion than a mix of policies

symbiosis vs crowding out the interaction of formal and informal credit markets in developing countries abstract it is a common observation in many developing countries that enterprises are active borrowers in both formal and informal credit markets we propose a model in which the formal sector s superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy the formal sector can screen borrowers by providing only partial financing for projects thereby forcing borrowers to resort to the informal sector for the remainder of the loan we use the model to predict how the market structure responds to changes in the environment and we consider the policy implications of various forms of government intervention

the financial crisis in thailand causes conduct and consequences abstract the financial crisis in thailand was a private sector failure expressing itself partly in increasing current account problems but mainly in careless lending borrowing and the accumulation of nonperforming loans in the financial sector during a period when the real economy showed signs of weakening with sluggish exports and an increase in the current account deficit hot money flowed in and covered the deficit but also led to careless investments financial liberalization in an uncontrolled financial sector resulted in misallocation and mismatching political instability indecisiveness and mismanagement at the political and administrative level also contributed to the financial meltdown in thailand

microcredit and the poorest of the poor theory and evidence from bolivia abstract we construct a theoretical framework that describes the social worth of a microfinance organization in terms of the depth worth to users cost to users breadth length and scope of its output we then analyze evidence of depth of outreach for five microfinance organizations in bolivia most of the poor households reached by the microfinance organizations were near the poverty line they were the richest of the poor group lenders had more depth of outreach than individual lenders the urban poorest were more likely to be borrowers but rural borrowers were more likely to be among the poorest

dea and sfa research on the efficiency of microfinance institutions a meta analysis microfinance has played a key role in the fight against exclusion and the promotion of entrepreneurship in developing countries an important question today is how to increase the reach and profitability of microfinance in a context where subsidies are withdrawing to promote the viability and sustainability of microfinance institutions mfis efficiency analysis has found favor in this context and has attracted growing interest among professionals partners and researchers abundant empirical work has been conducted over the last ten years on this subject in very different contexts and with different methodologies the purpose of this article is to provide a meta regression analysis on parametric and nonparametric estimations of mean technical efficiency mte in microfinance using a data set of 262 observations from 38 studies the results show that in the microfinance industry mte scores have increased over time however with an mte rate of approximately 61 1 there is room for improving efficiency mfis use more resources than necessary for the results achieved in terms of outreach and revenue generated our results show heterogeneity of mte according to the methodological approach of the studies studies with a larger number of variables inputs and outputs produced higher mte scores than did those with a smaller number of variables studies using the variable returns to scale assumption resulted in higher mte scores than those using constant returns to scale in addition those with a production approach had higher mtes than did those using the intermediation approach while studies of a large number of mfis had lower scores than did those involving a small sample size moreover research estimating social efficiency generated lower mtes compared to those estimating financial efficiency studies using data from african mfis obtained lower mtes than did those on mfis in latin america and mena which confirms the poor performance of african microfinance

microfinance its impact outreach and sustainability summary this symposium brings together recent empirical contributions with respect to a number of related and highly relevant issues on the economics of microfinance in particular the contributions provide answers to the following two main questions 1 does microfinance have an impact on the social and economic situation of the poor in developing nations and 2 are microfinance institutions sustainable in the long term and is there a trade off between sustainability and outreach

gender biases in bank lending lessons from microcredit in france the evidence on gender discrimination in lending remains controversial to capture gender biases in banks loan allocations we observe the impact on the applicants of a microfinance institution mfi and exploit the natural experiment of a regulatory change imposing a strict eur 10 000 loan ceiling on microcredit descriptive statistics indicate that the presence of the ceiling is associated both with bank mfi co financing and with harsher treatment of female borrowers to investigate causal links we develop an econometric approach that addresses the concerns of selection biases multicollinearity and endogeneity our empirical findings suggest that the change in the mfi s gender related attitude was triggered by banks through co financing hence we speculate that co financing pushes ceiling constrained mfis to import whatever biases in loan granting that the banks are prone to overall this paper stresses that apparently benign regulations such as loan ceilings can significantly harm the women s empowerment efforts made by mfis

the use of village agents in rural credit delivery using a simple principal agent model this article examines the incentive problems that arise when a formal financial institution such as a rural bank utilises a member of the rural community to act as an agent in screening potential borrowers and collecting repayment optimal compensation schemes are derived for the agent and their implications are discussed in addition i show that the norms and rules that govern village life may aid the financial institution by helping to constrain possible strategic behaviour by the agent

unsubsidized microfinance institutions this paper starts from the observation that 23 of the world s microfinance institutions mfis manage without subsidies we examine how unsubsidized institutions cope with their social mission overall the lack of subsidies worsens social performances however our results show that strategies to achieve financial self sufficiency differ substantially across regions african and asian mfis compensate for non subsidization by charging higher interest rates in eastern europe and central asia unsubsidized mfis find it more suitable to target less poor clients unsubsidized latin american mfis tend to reduce their share of female borrowers

a model of product proliferation with multiproduct firms this paper presents a model of product proliferation by multiproduct firms firm behavior is based on a two stage process in which there is centralized decision making in new product introductions and decentralized management of existing products in equilibrium the number of products each firm has as well as its total profits are inversely related to the cost of introducing a new product and to the number of firms in the market but as the number of rivals increases the total number of products in the market increases although total industry profits decrease copyright 1987 by blackwell publishing ltd

managing product families the case of the sony walkman abstract success in fast cycle industries e g consumer electronics can depend both on rapid model replacement and on model longevity although sony was as fast as any of its chief competitors in getting new models to market an important explanation for the wide variety of models offered by the firm is the greater longevity of its key models this finding adds an important insight to the conventional literature on time based competition which emphasizes rapid innovation exclusively sony s special understanding of the us market enabled it to respond more effectively to life style differences by locating industrial designers in its key markets sony s strong design capability and effective division of labor engineers lead generational and incremental projects industrial designers and market personnel lead topological projects allow for parallel model development investment in manufacturing flexibility amortized over multiple models within the product family make the rapid model changeover possible

the profit orientation of microfinance institutions and effective interest rates summary with the rise in the number of for profit microfinance institutions mfis commentators are asking whether the sector benefits by mfis having stronger profit orientations we address this question by analyzing the relationship between interest rates and adopting the for profit legal form appointing private sector representation and traditional banking experience to advisory boards and participating in more extensive for profit networks the results consistently indicate that a stronger for profit orientation corresponds with higher interest rates for mfi clients however this does not contribute to greater profitability and therefore sustainability because the stronger profit orientation is also associated with higher mfi costs

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

thy neighbor s keeper the design of a credit cooperative with theory and a test economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non firm economic institutions however our theories of non firm institutions often suggest different answers to many questions including those of policy this paper illustrates a method for discriminating between alternative theories using data from german credit cooperatives from the nineteenth and early twentieth century germany we build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data authors

on the rationale of bank lending in pre crisis thailand evidence from credit files is provided to examine bank lending determinants of thai commercial banks their lending practice follows reasonable patterns as a standard set of variables including indirect risk variables explains much of the variance in interest rate spread reflecting institutional differences with mature markets we find a higher importance of relationship banking and risk control via credit availability information about later default reveals prudent relationship lending however banks could have made better use of available information about borrowers riskiness these findings do not support a general verdict of bad banking but indicate room to improve lending decisions

determinants of the performance of microfinance institutions a systematic review microfinance institutions mfis generally aim at improving the access of the poor to financial services while at the same time being financially sustainable but what do we know about how mfis reach and combine these two goals we carry out a systematic review of close to 170 papers discussing the determinants of the financial and social performance of mfis the review shows that the most important determinants addressed in the literature are mfi characteristics size age and type of organization their funding sources the quality of organizational governance and the mfis external context such as macro economic institutional and political conditions the evidence on these issues is rather mixed moreover the direction of the relationship between these drivers and mfi performance depends on the context particularly the country specific context finally there is a lack of consensus in the literature on the measurement of financial and social performance due to the complexity of the concept we argue that social performance should only be assessed by using a multidimensional perspective this can be done either by applying recent and holistic social performance measures such as the spi4 or at least by using a combination of proxies such as outreach gender and rural measures

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

on the efficiency effects of subsidies in microfinance an empirical inquiry summary using an original database of rating agencies this paper gives empirical evidence on the impact of subsidy intensity on the efficiency of microfinance institutions mfis we find that subsidies have had a positive impact on efficiency in the sense that mfis that received subsidies are more efficient than those that do not however we find also that subsidization beyond a certain threshold renders the marginal effect on efficiency negative in our sample 26 of mfis receive levels of subsidization higher than that threshold which implies that a marginal cut on subsidy intensity would increase their efficiency

bad banking in thailand an empirical analysis of macro indicators it appears to be common wisdom that the basic cause of thailand s crisis is its extraordinarily weak financial institutions the article questions this proposition from an empirical viewpoint it is well established that the long term performance of thailand s financial system is favourable the insight from moral hazard indicators is unexpected regarding the bad banking proposition although not compelling finally the liberalisation process produced inadequately addressed risks however this also applies to experienced and well regulated foreign banks it is argued that the facts provided can be better explained in a framework of system change than by bad banking in thailand

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

rivalry in price and variety among supermarket retailers recent theoretical models of retail competition suggest that product heterogeneity is critical to retail price and variety strategies this article provides empirical evidence on supermarket retailers price and variety strategies using a nested constant elasticity of substitution nces modeling framework the model is estimated using chain level scanner data for four major grocery chains in a large urban west coast market the results show that retailers compete for market share using both price and variety while they all tend to follow moderately cooperative pricing strategies the extent to which they follow cooperative strategies in variety is less homogeneous

what type of microfinance institutions supply savings products abstract recent evidence shows that the poor desperately need access to savings products but despite this general consensus microfinance institutions mfis offering savings products are still under studied using random effect probit estimation on a dataset of 722 mfis active over the 2005 2010 period we try to identify the characteristics of those that collect voluntary savings our results suggest that these mfis have received fewer subsidies than their credit only counterparts in other words subsidies would crowd out micro savings products suggesting that donors generate negative externalities on product diversification

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

the sources of asian pacific economic growth the objective of this study is to analyze the sources of economic growth of ten asian pacific countries apcs china hong kong indonesia japan malaysia the philippines singapore south korea taiwan and thailand in conjunction with four industrialized western countries iwcs france west germany united kingdom and the united states in the postwar period in previous studies boskin and lau 1990 and kim and lau 1994c find for the group of five g 5 and the east asian newly industrialized countries nics respectively that 1 all countries share the same aggregate metaproduction function in terms of efficiency equivalent units and 2 technical progress can be represented in all countries as purely capitalaugmenting however kim and lau 1994c also find that there has been no measured technical progress in the east asian nics despite their much higher rates of economic growth the questions of interest in this study are 1 does the same aggregate meta production function that applies to the g5 countries and the east asian nics also apply to other apcs 2 does the finding of absence of technical progress hold for all the other apcs except japan and 3 what is the relative importance of the different sources of economic growth for the apcs

financing microfinance institutions subsidies or deposit mobilisation abstractaccording to conventional wisdom dependence on subsidies cannot achieve the double bottom lines of microfinance institutions mfis outreach and financial sustainability the application of market based principles to microfinancing such as deposit mobilisation has been long suggested as an answer to this problem this paper documents the following findings regarding this issue first deposit mobilisation crowds out subsidies second subsidies and deposit mobilisation reduce microcredit interest rates and allow mfis to reach poorer borrowers third subsidies and deposit mobilisation worsen financial sustainability fourth subsidies reduce repayment rates while deposit mobilisation has no impact on repayment overall the results suggest that neither subsidies nor deposit mobilisation solve the traditional problem of trade off between outreach and financial sustainability

financial liberalisation in emerging markets how does bank lending change financial liberalisation has often failed in the past due to underestimated problems of structural change we analyse such changes in lending behaviour of thai commercial banks during a liberalisation phase by way of unique micro data liberalisation has expected positive effects such as lowering the interest rate spread and collateral requirements liberalisation causes structural change such as a decline in collateral based and relationship banking however the liberal isation evidence is consistent with more risk taking such as lending to more risky projects and less protection against default the thai experience suggests obvious policy lessons

from ngos to banks does institutional transformation alter the business model of microfinance institutions microfinance which pledges to provide financial services to people without access to banking is chiefly run by non governmental organizations ngos little is known about the extent to which the transformation of these ngos into shareholder owned and most often regulated firms affects the way microfinance institutions mfis conduct their business by applying the event study methodology to 66 mfis that have transformed we quantify the effect that transformation has on the mfis business models our results suggest that portfolio yield is driven down by 3 9 percentage points due to transformation indicating that clients get more favorable interest rates at the same time mfis are able to significantly cut down their operational expenses of which 1 1 percentage points can be attributed to transformation other findings include a steep increase in commercial debt leverage and deposits a significant decrease in the fluctuation of funding costs and a sharp rise in average loan size profitability goes down in the short and medium term while return on equity is driven up in the medium to long run by exploiting within mfi data our approach goes beyond previous studies that mainly relied on between mfi data overall the results suggest that transformed mfis become an attractive environment for investors potentially encouraging a more profit seeking behavior among transformed mfis

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

a study of codes of ethics for mexican microfinance institutions most scholarly interest in codes of ethics or conduct has focused on traditional companies little is known about the codes of social enterprises or hybrid organizations such as microfinance institutions mfis our paper provides a comparative case study of the codes of a mexican microfinance network and seven mfis using the corporate integrity model we analyze the content of mfis codes compared to those of traditional organizations we then examine to what extent some specific features of mfis such as their mission target group and applied credit methodologies are factors that determine the content of their code we find that mfis codes like those of traditional companies include traditional stakeholder principles nevertheless they put greater emphasis on socially oriented principles or on terms such as people and common good mfis codes differ with respect to the items they include and exclude and the size of the covered sections we also find that these codes attempt to address prevailing concerns in microfinance but rarely tackle two critical debates namely levels of interest rates and of profitability we finally argue that it is difficult to move toward a global code owing to regional disparities and the variety of organizational models and missions