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

share contracts and their rationale lessons from marine fishing most of the existing literature on share contracts is based explicitly or implicitly on agriculture a sector in which share contracts are seldom dominant and apparently on the decline moreover since agricultural activities have some rather special characteristics the purpose of the present article is to analyse contractual choice and especially the choice of share contracts in a sector in which share contracts are dominant namely fishing in the process of explaining the dominance of share contracts in fishing the article also explains a some heretofore neglected features of these share contracts such as the way in which shares are calculated and the treatment of repair and maintenance expenditures b the nature and extent of interlinked transactions c the exceptional cases where share contracts are not used and d the relevance of varying environmental conditions and especially those of poor developing countries to the nature of contracts in fishing and to the differences therein between

seasonality differential access and interlinking of labour and credit this article explains the interlinking of rural labour and credit transactions in terms of differential access to credit markets and seasonality a model is developed which incorporates not only seasonality and differential access but also several other explanations for interlinking suggested in the literature moreover it allows one to test the sensitivity of the results to differing powers on the part of landowners relative to working households

agent compensation and the limits of bonding agents in positions of trust may engage in malfeasance which is difficult to detect this paper develops a model in which employers seek to control malfeasance by paying wages contingent on imperfect monitoring and agents may be required to pay entry fees or post bonds we conclude that entry fees which exceed agents assets are ineffective in controlling malfeasance as a result conditions exist in which it is optimal to pay agents more than their opportunity cost such conditions lead to an excess supply of applicants and allow employers to engage in discrimination at zero cost to themselves

an eoq model with stock dependent demand shortage inflation and time discounting abstract this paper develops a finite time horizon deterministic economic order quantity eoq inventory model with shortages where the demand rate at any instant depends on the on hand inventory stock level at that instant the effects of inflation and the time value of money are taken into account considering two separate inflation rates namely the internal company inflation rate and the external general economy inflation rate the results are discussed with a numerical example and particular case of the model is discussed in brief a sensitivity analysis of the optimal solution with respect to the parameters of the system is carried out

a limited dependent analysis of the choice of regular labour contract in seasonal agriculture the paper examines both theoretically and empirically the factors determining the demand for regular labour in seasonal agriculture in an implicit contract framework it is argued that there are hoarding costs of regular labour in the slack period when there is not much work to be done consequently the number of regular labour employed is constrained by the hoarding cost where larger employment intensive farms tend to hire more regular labour evidence from the icrisat villages in india too show that though the marginal costs of regular labour are zero there are significant hoarding costs of regular labour among small farms so that larger farmers are the major demanders of regular labour estimates of the double hurdle model jointly determining the probability of hiring regular labour and demand for regular labour hours if a regular labour is hired are shown to be an improvement over univariate tobit estimates of the demand for regular labour hours only

interfirm relationships and informal credit in vietnam trading relations in vietnam s emerging private sector are shaped by two market frictions the difficulty of locating trading partners and the absence of legal enforcement of contracts examining relational contracting we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier a longer duration of trading relationship is associated with larger credit as is prior information gathering customers identified through business networks receive more credit these network effects are enduring suggesting that networks are used to sanction defaulting customers

why don t the poor save more evidence from health savings experiments using data from a field experiment in kenya we document that providing individuals with simple informal savings technologies can substantially increase investment in preventative health and reduce vulnerability to health shocks simply providing a safe place to keep money was sufficient to increase health savings by 66 percent adding an earmarking feature was only helpful when funds were put toward emergencies or for individuals that are frequently taxed by friends and relatives group based savings and credit schemes had very large effects

labor tying in a poor agrarian economy a theoretical and empirical analysis in this paper we show how tied labor contrary to its common characterization as a feudal relic and as a symptom of economic stagnation may actually be strengthened by capitalist agricultural development we construct a simple two period theoretical model of a two tiered labor market to show how the proportional importance of voluntary labor tying contracts may increase with yield increasing improvements and with a tightening of the labor market we then provide in support of these hypotheses some general historical as well as more detailed econometric evidence from a variety of cross sectional data in rural india

ford whitman harris and the economic order quantity model ford whitman harris first presented the familiar economic order quantity eoq model in a paper published in 1913 even though harris s original paper was disseminated widely it apparently was unnoticed for many years before its rediscovery in 1988 during this period much confusion developed over the origin of the eoq model this paper explores the early literature on this model and traces the evolution of the confusion it also sketches the remarkable life of harris who made contributions as an engineer inventor author and patent attorney even though he received no formal education beyond high school harris s original 1913 essay is reprinted following this paper

efficiency and equity tradeoffs incentive compatible contracts revisited abstract while the efficiency of certain contractual choices has been well established less attention has been given to the distributional outcomes of contracting in natural resource based industries data from a case study of seed gatherers in honduras demonstrates that workers paid under a relative payment system receive an earnings premium of about 25 of which 40 cannot be explained by observed differences in worker productivity a theoretical agency model is outlined in the appendix to explain why workers under tournaments necessarily enjoy a higher return than those under piece rates implying a more skewed income distribution as suggested in the efficiency wage literature

commercialization and the decline of joint liability microcredit abstract numerous authors point to a decline in joint liability microcredit and rise in individual liability lending but empirical evidence is lacking and there have been no rigorous analyses of possible causes we first show using the well known mix market dataset that there is evidence for a decline second we show theoretically that commercialization an increase in competition and a shift from non profit to for profit lending both of which are present in the data drives lenders to reduce their use of joint liability loan contracts third we test the model s key predictions and find support for them in the data

consumption efficiency and surplus labour abstract if 1 there is a long term relationship between consumption and labour efficiency 2 long employment contracts are possible and 3 production is seasonal a trade off emerges between positive effects of permanent contracts on productivity and the costly seasonal idleness of permanent labour possible outcomes include 1 co existence of casual and permanent contracts with number of workers affecting proportion of permanent to temporary employees but not output classical disguised unemployment 2 exclusively casual employment with output negatively related to workforce leibenstein mazumdar surplus labour and 3 permanent contracts only with open unemployment and a positive relationship between number employed and output the mirrlees bliss stern stiglitz solution conditions are derived for each solution

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

informal insurance arrangements with limited commitment theory and evidence from village economies recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income thus rejecting the hypothesis of full risk pooling we attempt to explain these observations by adding limited commitment as an impediment to risk pooling we provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment and test the model using data from three indian villages we find that the model can fully explain the dynamic response of consumption to income but that it fails to explain the distribution of consumption across households

credit markets in northern nigeria credit as insurance in a rural economy this article addresses the issues of imcomplete markets and imperfect information in the context of credit markets in rural northern nigeria in much recent theoretical literature the problems of moral hazard and adverse selection are assumed to be decisive for the organization of agrarian institutions in contrast it is found that in the four villages surveyed credit transactions take advantage of the free flow of information within rural communities information asymmetries between borrower and lender are unimportant and their institutional consequences the use of collateral and interlinked contracts are absent credit transactions play a direct role in pooling risk between households through the use of contracts in which the repayment owed by the borrower depends on the realization of random production shocks by both the borrower and the lender

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

a simultaneous approach to the estimation of risk aversion and the subjective time discount rate in this paper we analyze a sample of 1832 individuals who responded to six randomly generated lottery questions that differ with respect to chance prize and the timing of the draw using a model that explicitly allows for consumption smoothing we obtain an estimate of relative risk aversion of 82 instead assuming consumption to be immediate gives an estimate of 2 close to what is traditionally reported while a model of full asset integration gives estimates higher by several orders of magnitude our results show that estimated risk aversion is sensitive to the assumptions made with respect to the consumption profile and that it is possible to determine the level of asset integration endogenously the average subjective time discount rate which includes a preference for the present equals 6 percent per month it is found that both parameters vary strongly over individuals and that the variation can be explained by income age gender and entrepreneurship consistent with the majority of previous evidence

east west joint ventures and buyback contracts abstract contractual joint ventures cjvs and the buyback form of countertrade are popular methods that socialist countries use to attract foreign investment in this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts the existence of sharing rules and minimum standard requirements on inputs the model stresses the incentive problems involved when a socialist host country which does not allow foreign direct investment uses a cjv to obtain the fruits of some knowledge based production process from a multinational enterprise

shirking and the choice of technology a theory of production inefficiency with an empirical application abstract we develop a model of shirking and technology choice and show that organizations exercising less effective direct control over shirking adopt technologies that underutilize the workforce to a greater degree relative to neoclassical counterparts in order to control shirking indirectly thus technical inefficiency arises endogenously as a rational response to allocative inefficiency caused by shirking an empirical analysis of data from a sample of collective and private farms operating in jewish palestine reveals the presence of shirking and supports the prediction that farms with less effective direct control over shirking exhibit greater labor hoarding as a manifestation of technical inefficiency

small stakes risk aversion in the laboratory a reconsideration evidence of risk aversion in laboratory settings over small stakes leads to a priori implausible levels of risk aversion over large stakes under certain assumptions one core assumption in statements of this calibration puzzle is that small stakes risk aversion is observed over all levels of wealth or over a sufficiently large range of wealth although this assumption is viewed as self evident from the vast experimental literature showing risk aversion over laboratory stakes it actually requires that lab wealth be varied for a given subject as one evaluates the risk attitudes of the subject we consider evidence from a simple design that tests this assumption and find that the assumption is strikingly rejected for a large sample of subjects from a population of college students we conclude that the implausible predictions that flow from these assumptions do not apply to one specialized population widely used to study economic behavior in laboratory experiments

what drives value creation in investment projects an application of sensitivity analysis to project finance transactions abstract evaluating the economic attractiveness of large projects often requires the development of large and complex financial models model complexity can prevent management from obtaining crucial information with the risk of a suboptimal exploitation of the modelling efforts we propose a methodology based on the so called differential importance measure d to enhance the managerial insights obtained from financial models we illustrate our methodology by applying it to a project finance case study we show that the additivity property of d grants analysts and managers full flexibility in combining parameters into any group and at the desired aggregation level we analyze investment criteria related to both the investors s and lenders perspectives results indicate that exogenous factors affect investors sponsors and lenders in different ways whether exogenous variables are considered individually or by groups

the theory of the firm in long run equilibrium in a recent series of articles economists have investigated the comparative statics of the neoclassical firm in a competitive environment with the specific proviso that output price adjusts in response to changes in factor prices the older theory of the firm such as is found for example in paul samuelson 1947 is deficient in this regard metaphors such as short run have been used to gloss over the inconsistency of holding output price constant in the face of changing costs through changing factor prices in this paper a simple yet thorough analysis of a firm in a competitive industry i e a firm facing zero entry and adjustment cost conditions is given new results pertaining to restrictions on the behavior of such firms are offered also the length and complexity of established results is substantially reduced

comparative statics of the firm abstract complementarities arise naturally in diverse models of optimal decision making in a firm theoretical properties of supermodular functions provide a powerful tool for analyzing qualitative properties in such circumstances this paper considers a general model of the firm and gives sufficient conditions for complementarities to hold and for optimal decisions to be monotone with a parameter a variety of specific models of the firm are shown to satisfy these conditions necessary conditions delimit those models of the firm that may exhibit monotone optimal decisions journal of economic literature classification numbers b41 c61 d20 l00

incentives and the de soto effect this paper explores the consequences of improving property rights to facilitate the use of fixed assets as collateral popularly attributed to the influential policy advocate hernando de soto we use an equilibrium model of a credit market with moral hazard to characterize the theoretical effects and also develop a quantitative analysis using data from sri lanka we show that the effects are likely to be nonlinear and heterogeneous by wealth group they also depend on the extent of competition between lenders there can be significant increases in profits and reductions in interest rates when credit markets are competitive however since these are due to reductions in moral hazard that is increased effort the welfare gains tend to be modest when cost of effort is taken into account allowing for an extensive margin where borrowers gain access to the credit market can make these effects larger depending on the underlying wealth distribution

permanent labour and land tenancy contracts in agrarian economies an integrated analysis extending the existing models of land and labour contracts this study attempts to build a general model of long term agrarian contracts the model implies that where tenancy is an available option the fixed wage permanent labour contract will not be chosen if it is chosen under institutional constraints on tenancy contracts resulting resource allocations will be inefficient empirical relevance of the model is tested on data from the philippines

targeting child labor in debt bondage evidence theory and policy implications despite recent multilateral efforts to single out child labor in debt bondage as one of the worst forms of child labor several important questions have yet to be addressed how pervasive is the phenomenon are there systematic correlations between the incidence of children in debt bondage and the economic legislative and financial development indicators of the economy how does an understanding of these correlates affect the way national and international policy measures aimed at targeting this form of child labor are perceived this article addresses each of these questions the empirical findings suggest strong correlation between the likelihood of the incidence of child labor in debt bondage with the stage of development of an economy the stage of financial development and enforcement of core labor rights building on this evidence the article presents a theoretical model that highlights the drawbacks and merits of a number of policies aimed at putting checks on child labor in debt bondage

stochastic properties of a production inventory process with planned production using transform methodology abstract we consider a stochastic inventory process in which demand is generated by individual events separated by independent stochastic time intervals whereas production takes place in batches of possibly varying sizes at different points in time the resulting processes are analysed using laplace transform methodology expressions for inventory and stockouts are developed applying the theory of residues an example includes poisson distributed demand intervals assuming costs for set ups for carrying inventory and for stockouts conditions are developed for determining the optimal production policy on the one hand when applying the traditional average cost measure on the other when applying the annuity stream principle

the return to capital in ghana we show that the real return to capital in ghana s informal sector is high for farmers we find annual returns ranging from 205 350 in the new technology of pineapple cultivation and 30 50 in well established food crop cultivation we also examine the relative prices of durable goods of varying durability and estimate a lower bound to the opportunity cost of capital of 60 this abstract was borrowed from another version of this item

a theory of interactions between mfis and informal lenders abstract we provide a theoretical analysis of effects of entry of a microfinance institution mfi into an informal credit market which is segmented whereby informal lenders derive some market power owing to privileged information concerning borrower specific default risks relative to informal lenders the mfi has a cost advantage and an informational disadvantage regarding borrower risk borrowers differ along another dimension landholding which is observable to all lenders mfi entry is shown to induce selection effects across risk and landownership dimensions in shifts of borrowers from informal lenders to the mfi which could raise informal interest rates as observed in many ldcs the model is consistent with evidence from bangladesh and west bengal in contrast to hypotheses based on cream skimming scale diseconomy inducing collusion facilitating or crowding in effects of mfis on informal credit the model implies that mfi entry is pareto improving for borrowers irrespective of effects on informal interest rates

rural labor legislation and permanent agricultural employment in northeastern brazil abstract permanent annual or longer term agricultural employment declined relative to temporary daily weekly or seasonal employment during the 1960s in a sugar cane producing region in northeastern brazil but increased rapidly during the 1970s predictions from economic theory are combined with observations about the economic forces at work during the period to argue that in the absence of government intervention permanent employment would likely have risen during both decades the argument renders the introduction of the brazilian rural labor statute rls of 1963 a strong candidate explanation for the decline of permanent employment in the 1960s the rls s employment stability provision which required employers to make severance payments to workers with at least one year tenure dismissed without just cause not only increased the expected cost of permanent contracts but also changed the very nature of permanent employment prior to the legislation employers induced permanent workers to be subject to them by giving them premium wage and benefits packages and threatening to dismiss them if caught shirking in subjection severance pay provisions made such threats incredible the elimination of farmers ability to derive subjection benefits from permanent employees reduced even further the incentive to hire workers under permanent contracts

access to capital in rural thailand an estimated model of formal versus informal credit the aim of this paper is to understand the mechanism underlying access to credit the author focuses on two important aspects of rural credit markets in thailand first moneylenders and other informal lenders coexist with formal lending institutions such as government or commercial banks and more recently micro lending institutions second potential borrowers presumably face sizable transaction costs obtaining external credit the author develops and estimates a model based on limited enforcement and transaction costs that provides a unified view of those facts the results show that the limited ability of banks to enforce contracts more than transaction costs is crucial in understanding the observed diversity of lenders

cooperation in community interaction without information flows we study cooperative behaviour in communities where the flow of information regarding past conduct is limited or missing players are initially randomly matched with no knowledge of each other s past actions they endogenously decide whether or not to continue the repeated relationship there is incomplete information regarding player types a subset of the population is myopic while the remainder have discount factors that permit cooperation in principle we define social equilibrium in such communities such equilibria are characterized by an initial testing phase followed by cooperation if the test is successful it is precisely the presence of myopic types that permit cooperation by raising barriers to entry into new relationships we examine the implications of increased patience which takes two forms an increase in the number of non myopic types and an increase in the discount factor of non myopic types these two notions turn out to have strikingly different implications for the degree of cooperation that can be sustained

global sensitivity analysis in inventory management abstract this paper deals with the sensitivity analysis sa of inventory management models when uncertainty in the input parameters is given full consideration we make use of sobol function and variance decomposition method for determining the most influential parameters on the model output we first illustrate the method by means of an analytical example we provide the expression of the global importance of demand holding costs order costs of the harris economic order quantity eoq formula we then present the global sa of the inventory management model developed by luciano and peccati 1999 capital structure and inventory management the temporary sale problem international journal of production economics 59 169 178 for the economic order quantity estimation in the context of the temporary sale problem we show that by performing global sa in parallel to the modeling process an analyst derives insights not only on the eoq structure when its expression is not analytically known but also on the relevance of modeling choices as the inclusion of financing policies and special orders

does supervision matter some hypothesis tests using indian farm level data abstract a model is developed and estimated to test for heterogeneity of family and hired labor in agricultural production and to estimate the impact of employer supervision on the productivity of hired labor plot level data are used from a rice growing village in semi arid tropical india the hypothesis that family and hired labor are homogeneous inputs was rejected results indicate that family member supervision is required to increase hired labor productivity output loss attributable to operating at reduced supervision intensity was greater than 10 on over 40 of the plots

observing unobservables identifying information asymmetries with a consumer credit field experiment information asymmetries are important in theory but difficult to identify in practice we estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology we randomized 58 000 direct mail offers to former clients of a major south african lender along three dimensions i an initial offer interest rate featured on a direct mail solicitation ii a contract interest rate that was revealed only after a borrower agreed to the initial offer rate and ii a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing these three randomizations combined with complete knowledge of the lender s information set permit identification of specific types of private information problems our setup distinguishes hidden information effects from selection on the offer rate via unobservable risk and anticipated effort from hidden action effects via moral hazard in effort induced by actual contract terms we find strong evidence of moral hazard and weaker evidence of hidden information problems a rough estimate suggests that perhaps 13 to 21 of default is due to moral hazard asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high risk borrowers

evaluation of capital costs in a multi level inventory system by means of the annuity stream principle abstract in this paper some results obtained from applying the annuity stream principle for evaluating capital tied up in inventory and work in progress and presented this principle departs from the cashflows associated with the production inventory processes considered in contrast to traditional procedures by which the inventory value is determined from physical stock evaluated at costs incurred to date in many situations it appears that the traditional procedure will underestimate the amount of capital tied up in production in this paper the two principles are applied to a multi level inventory system and the capital cost expressions and optimal order quantities are compared

finite change comparative statics for risk coherent inventories abstract this work introduces a comprehensive approach to the sensitivity analysis sa of risk coherent inventory models we address the issues posed by i the piecewise defined nature of risk coherent objective functions and ii by the need of multiple model evaluations the solutions of these issues are found by introducing the extended finite change sensitivity indices fcsi s we obtain properties and invariance conditions for the sensitivity of risk coherent optimization problems an inventory management case study involving risk neutral and conditional value at risk cvar objective function illustrates our methodology three sa settings are formulated to obtain managerial insights numerical findings show that risk neutral decision makers are more exposed to variations in exogenous variables than cvar decision makers

a note on the sensitivity analysis of the internal rate of return abstract in this note we discuss the sensitivity analysis of the internal rates of return irr we show that the use of partial derivatives can be misleading in the identification of key drivers of an investment project s performance to remedy this shortcoming we propose the use of an alternative sensitivity measure called the differential importance measure the analysis shows that even if the theoretical conditions for using the net present value or the irr as valuation criteria apply the sensitivity analysis results for the two indicators may differ

is profit sharing a cure for unemployment in less developed countries abstract the effects of introducing profit sharing in modern sectors in ldcs are discussed within a dual model with endogenous wages and internal migration profit sharing does not have a direct job creation effect as long as firms set the pay parameters yet the new system may have long run effects on employment allocation under some circumstances profit sharing may in fact destabilize short run employment such that jobs last for a shorter duration modern sector wages are then raised to discipline workers and urban unemployment goes up arguments are also given for the hypothesis that profit sharing stabilizes short run employment with the opposite results

microfinance and dynamic incentives dynamic incentives where incentives to repay are generated by granting access to future loans is one of the methodologies used by microfinance institutions mfis in this paper i present a model of dynamic incentives where lenders are uncertain over how much borrowers value future loans loan terms are determined endogenously and loans become more favorable as the probability of default becomes lower i show that in all equilibria but one all borrowers default including the most patient ones i then compare equilibria with and without double dipping i show that when credit constrained borrowers have access to multiple loans equilibrium loan terms have to become more favorable to overcome increased gains from default if borrower s access to multiple loans is unforseen by lenders then the default rates go up in the short run finally if lenders use group loans it generates endogenous hyperbolic discounting even though the borrowers are exponential discounters

how many parts to make at once reprinted from factory the magazine of management volume 10 number 2 february 1913 pp 135 136 152 interest on capital tied up in wages material and overhead sets a maximum limit to the quantity of parts which can be profitably manufactured at one time set up costs on the job fix the minimum experience has shown one manager a way to determine the economical size of lots

an analysis of declining incidence of regular labour contracts in rural india evidence obtained from the icrisat villages in india suggests that the decline of regular contracts has been accompanied by the growth in real wages and casualisation of the rural labour force in view of this evidence the article examines the causes of the declining incidence of regular contracts in rural india we argue that this has been caused by the leftward shift in the regular labour supply curve due to improved employment and credit opportunities and not an upward movement of the labour demand curve as manifested by the increase in real wages over the years

minorities and endogenous segregation a theoretical analysis is proposed of segregation as an equilibrium phenomenon in a randommatching model of the marriage market otherwise identical partners possess a pay off irrelevant characteristic colour we derive the set of colour blind equilibria and show that they are generically constrained inefficient equilibrium segregation strategies are strategies that condition actions on the type of match it is shown that distributions of types exist such that segregation equilibrium pay offs pareto dominate colour blind pay offs for other distributions segregation also generates conflict where the majority unambiguously gains while the minority group may lose giving preferential treatment that is minority bias can increase overall welfare

sensitivity analysis of the newsvendor model abstract quality of decisions in inventory management models depends on the accuracy of parameter estimates used for decision making in many situations error in decision making is unavoidable in such cases sensitivity analysis is necessary for better implementation of the model though the newsvendor model is one of the most researched inventory models little is known about its robustness in this paper we perform sensitivity analysis of the classical newsvendor model conditions for symmetry skewness of cost deviation i e deviation of expected demand supply mismatch cost from its minimum have been identified these conditions are closely linked with symmetry skewness of the demand density function a lower bound of cost deviation is established for symmetric unimodal demand distributions based on demonstrations of the lower bound we found the newsvendor model to be sensitive to sub optimal ordering decisions more sensitive than the economic order quantity model order quantity deviation i e deviation of order quantity from its optimum is explored briefly we found the magnitude of order quantity deviation to be comparable with that of parameter estimation error mean demand is identified as the most influential parameter in deciding order quantity deviation

differential importance and comparative statics an application to inventory management abstract in this work we deal with the problem of establishing which parameters impact an inventory policy the most a new sensitivity measure is introduced by relating the differential importance d and the comparative statics cs techniques we discuss the properties of the new indicator and show that it shares the additivity property we provide the expression of for optimization models numerical results are offered for the sensitivity analysis of a recently introduced inventory management model

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

the importance of assumptions in investment evaluation abstract this work illustrates a new method for estimating the importance of assumptions in investment evaluation the most diffused sensitivity analysis schemes present limitations when used to assess the importance of individual parameters and cannot be employed to estimate the importance of groups of assumptions however such problems can be solved by making use of the differential importance measure dim we set forth the framework for the application of dim at the parameter level of investment valuation models we study the relationship between dim and investment marginal behavior we analyze the link between importance of a parameter and risk associated with it we discuss general results for a sample valuation model the numerical application to the valuation of an energy sector investment project follows we rank the factors based on their importance and determine the project risk profile we discuss the importance of groups of assumptions results will show that assumptions relating to revenues are the most influential ones followed by discounting and operating cost assumptions we discuss numerically the relationship between importance and risk analyzing the effect of variable costs hedging through the comparison of the project risk profile in the presence and in the absence of such a hedging

returns to capital in microenterprises evidence from a field experiment small and informal firms account for a large share of employment in developing countries the rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity however measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks which are likely to be correlated with capital stock the authors use a randomized experiment to overcome this problem and to measure the return to capital for the average microenterprise in their sample regardless of whether they apply for credit they accomplish this by providing cash and equipment grants to small firms in sri lanka and measuring the increase in profits arising from this exogenous positive shock to capital stock after controlling for possible spillover effects the authors find the average real return to capital to be 5 7 percent a month substantially higher than the market interest rate they then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household but not to vary with risk aversion or uncertainty

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

imperfect information screening and the costs of informal lending a study of a rural credit market in pakistan many governments have perceived the rural moneylender as usurious this article takes a first step toward directly testing the validity of this view in a study of services costs and charges of fourteen informal market moneylenders and their clients in chambar pakistan the article examines whether the high implicit interest rates charged reflect the actual costs of operating in that market estimates of the resource costs incurred by informal lenders for screening pursuing delinquent loans overhead and cost of capital including unrecoverable loans suggest that lenders charges are equal to their average cost of lending but exceed their marginal cost this finding is consistent with the view that the informal credit market is characterized by excess capacity and monopolistic competition in the presence of imperfect information

here today gone tomorrow can dynamic incentives make microfinance more flexible this paper presents a model of microfinance lending to individuals that uses dynamic incentives in the form of access to additional loans to discourage borrowers from strategic default or the unwillingness to repay a loan once a positive outcome is realized we propose an improvement on contracts currently used by microfinance institutions mfis by endogenizing the default penalty while constraining the mfi to maintain sustainable lending operations furthermore accounting for the risks that the poor face by including a negative economic shock we show that under certain circumstances the punishment for default need not be a lifetime without loans

attached farm labor limited horizons and servility abstract two facets of attached farm labor arrangements the servility often required of attached laborers and employers interest in maintaining such workers limited horizons are described and incorporated into an otherwise standard model of attached and temporary agricultural employment substantially modifying the model s predictions the dependence of workers preferences on reference group behavior which underlies employers interest in limiting horizons may enable employers to drive even freely mobile workers wellbeing below competitive levels may imply that abolishing servility arrangements would benefit all workers gives rise to multiple equilibria in community layout and culture and sheds light on some characteristics of agrarian revolts

the deterministic eoq and epq with partial backordering at a rate that is linearly dependent on the time to delivery abstract our original models for the eoq and epq with partial backordering assumed that the backordering rate is a constant in this paper we extend those models to allow to increase linearly as the time until delivery decreases we show how those previous models can be adapted to find the optimal decision variable values for this new assumption and develop for each model type a condition that the initial value of must meet for partial backordering to be optimal

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

moneylenders and bankers price increasing subsidies in a monopolistically competitive market abstract in many areas of the world a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision we present models of markets with endogenous enforcement costs motivated by studies of rural credit markets we show that subsidies may have perverse effects under monopolistic competition increasing prices or inducing exit higher prices interest rates result from the loss of scale economies or from negative externalities among suppliers the models are consistent with the puzzling evidence that infusions of government subsidized formal credit have not improved the terms offered by moneylenders

risk aversion experimental evidence from south african fishing communities we estimate the risk attitudes of a large sample of individuals from various fishing communities along the west coast of south africa female fishers and rights holders are found to be more risk averse than their male counterparts while rights holders are found to be less risk averse relative to subjects without fishing rights risk attitudes are found to be correlated with compliance with fisheries regulations in particular a greater degree of risk aversion translates into a reduction in compliance furthermore in the case of gender female fishers and rights holders are more likely to comply with fisheries regulations

group lending under asymmetric information abstract this paper examines joint liability loan contracts as part of a screening mechanism adopted by lenders using group lending schemes a model and one period game are introduced in order to analyze the type of optimal loan contracts that emerge when lenders have less information than borrowers it is shown that under imperfect information lenders may be able to utilize joint liability contracts as a means of screening agent types by inducing endogenous group formation and self selection among the borrowers

the economy of high wages an agency problem latitude with respect to the effort they supply and monitoring of effort and output is costly in this paper we examine the agency problem that arises in these circumstances the agent employee is assumed to maximize expected utility which depends on wages and effort a bad we assume that output is a deterministic function of effort that either effort or output can be accurately monitored and that monitoring is costly the firm s problem is to select a level of monitoring and a compensation package that will minimize the cost of obtaining a desired level of effort given the cost of monitoring the agent s preferences and the agent s opportunity cost of accepting employment with the firm his labour supply constraint the firm chooses a compensation scheme from the set in which compensation is contingent on effort if the agent is monitored and is equal to a standard

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

are commercial fishers risk lovers fishers are risk averse according to most empirical studies while expected utility theory predicts risk neutrality even for sizable stakes we test this prediction using data from a stated choice experiment with swedish commercial fishers our results show that only 48 of the fishers can be broadly characterized as risk neutral while 26 are modestly risk averse and 26 are strongly riskaverse fishers are more risk neutral the higher the fraction of their household s income comes from fishing sensitivity testing implies that modest stake decisions like a few days of fishing are not influenced by wealth level

competing lending platforms endogenous reputation and fragility in microcredit markets this paper shows that market fragility and mass default can arise in microcredit markets as a result of the strategic interaction between a microlender using a reputation based mechanism and a traditional lender using physical collateral in our model borrowers solve a dynamic programming problem which induces an endogenous equilibrium distribution of reputational capital because the quality of each lender s pool of borrowers is affected by both lenders interest rates lender reaction curves are non monotonic and discontinuous this can result in knife edge equilibria and mass default on the microlender precipitated by minor parametric perturbations fragility is exacerbated by borrower screening and sovereign risk but ameliorated when microlenders have social welfare goals our results highlight the importance of studying the entire credit market rather than microfinance in isolation

productivity and distribution under cropsharing tenancy abstract this paper develops a model of sharecropping assuming tenant autonomy competitive behavior of landlords and laborers and endogenously determined wage and share rental rates the coexistence of wage labor and sharecropping is explained in terms of their incentive labor process and risk sharing characteristics sharecropping serves as a surrogate for the direct supervision of the labor process its incidence is shown to rise in the presence of unemployment at a subsistence wage the model implies that the abolition of tenancy will raise output raise labor income and reduce land income

group lending local information and peer selection this paper analyzes how group lending programs use joint liability to utilize local information that borrowers have about each other s projects through self selection of group members in the group formation stage these schemes are shown to lead to positive assortative matching in group formation faced with the same contract this makes the effective cost of borrowing lower to safer borrowers because they have safer partners conditional on success their expected dues to the lender are lower than that of riskier borrowers the resulting improvement in the pool of borrowers is shown to increase repayment rates and welfare q 1999 elsevier science b v all rights reserved

the value of relationships evidence from a supply shock to kenyan rose exports this paper provides evidence on the importance of reputation in the context of the kenyan rose export sector a model of reputation and relational contracting is developed and tested a seller s reputation is defined by buyer s beliefs about seller s reliability we show that i due to lack of enforcement the volume of trade is constrained by the value of the relationship ii the value of the relationship increases with the age of the relationship and iii during an exogenous negative supply shock deliveries are an inverted u shaped function of relationship s age models exclusively focusing on enforcement or insurance considerations cannot account for the evidence jel d86 f14 l14 o13 o19 q17 imperfect contract enforcement is a pervasive feature of real life commercial transactions in the absence of formal contract enforcement trading parties rely on informal mechanisms to guarantee contractual performance e g johnson mcmillan and woodruff 2002 greif 2005 fafchamps 2010 among those mechanisms long term relationships based on trust or reputation are perhaps the most widely studied and have received substantial theoretical attention the theoretical literature has developed a variety of models that capture salient features of real life relationships e g enforcement problems e g macleod and malcomson 1989 baker gibbons and murphy 1994 baker gibbons and murphy 2002 levin

sensitivity analysis in investment project evaluation abstract this paper discusses the sensitivity analysis of valuation equations used in investment decisions since financial decision are commonly supported via a point value of some criterion of economic relevance net present value economic value added internal rate of return etc we focus on local sensitivity analysis in particular we present the differential importance measure dim and discuss its relation to elasticity and other local sensitivity analysis techniques in the context of discounted cash flow valuation models we present general results of the net present value and internal rate of return sensitivity on changes in the cash flows specific results are obtained for a valuation model of projects under severe survival risk used in the industry sector of power generation

minimum wage legislation in a dual labor market the paper studies the equilibrium effects of minimum wage legislation in an economy with coexisting primary and secondary labor markets owing to difficulties in monitoring relative wages and the threat of job loss play a functional role in eliciting effort from primary sector workers minimum wage laws hence affect the primary wage and employment level even if the law only binds in the secondary labor market furthermore interaction between the two sectors can also alter the secondary outcome relative to the standard analysis and has implications for participation decisions and for the level of unemployment

factor markets and resource allocation in colonial punjab it is often argued that agricultural factor markets in colonial india were underdeveloped leading to inefficient resource use and slow agricultural development however there is little econometric evidence on these issues this article outlines a model which incorporates the factor market imperfections discussed in the literature and tests the model against data from the punjab there is in the statistical sense evidence of resource misallocation however these effects are too small to be of much economic significance

information and enforcement in informal credit markets we study loan enforcement in informal credit markets with multiple lenders but no sharing of credit histories and derive the dynamics of loan size and interest rates for relational lending in the presence of a sufficient fraction of natural defaulters the rest of the market can be incentivized against default by micro rationing sharper credit limits and possibly higher interest rates that serve as gateways into new borrowing relationships when there are too few natural defaulters in the market this can be supplemented by macro rationing random exclusion of some borrowers when information collection is endogenized multiple equilibria may arise

risk aversion and expected utility of consumption over time the calibration theorem by rabin rabin m 2000a risk aversion and expected utility theory a calibration theorem econometrica 68 1281 1292 rabin m 2000b diminishing marginal utility of wealth cannot explain risk aversion in kahneman d tversky a eds choices values and frames cambridge university press implies that seemingly plausible small stake choices under risk imply implausible large stake risk aversion this theorem is derived based on the expected utility of wealth model however cox and sadiraj cox j c sadiraj v 2006 small and large stakes risk aversion implications of concavity calibration for decision theory games econ behav 56 45 60 show that such implications do not follow from the expected utility of income model one may then wonder about the implications for more applied consumption analysis the present paper therefore expresses utility as a function of consumption in a standard life cycle model and illustrates the implications of this model with experimental small and intermediate stake risk data from holt and laury holt c a laury s k 2002 risk aversion and incentive effects amer econ rev 92 1644 1655 the results suggest implausible risk aversion parameters as well as unreasonable implications for long term risky choices thus the conventional intertemporal consumption model under risk appears to be inconsistent with the data c 2009 elsevier inc all rights reserved less

experimental evidence on returns to capital and access to finance in mexico a strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies as firms with productive investment opportunities underinvest lack of access to finance is a frequent complaint of microenterprises which account for a large share of employment in developing countries however assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm such as entrepreneurial ability and demand shocks in a randomized experiment that gave cash and in kind grants to small retail firms providing an exogenous shock to capital the shock generated large increases in profits with the effects concentrated among firms that were more financially constrained the estimated return to capital was at least 20 33 percent a month three to five times higher than market interest rates

capital structure and inventory management the temporary sale price problem the paper discusses the use of adjusted present value techniques in a problem of inventory management the temporary sale price problem in the presence of equity or debt financing while traditional net present value approaches produce results very similar to those of the average cost approach our consideration of the capital structure of the firm opens the way to theoretically and numerically different inventory policies