equity, mainly the initial million baht, if it had to borrow the funds from the BAAC or equivalent institution, all divided by its total capital. By this measure, the average profit rate was -13.4%, but it should be emphasized that little of this loss represents an actual leakage of cash.

We argued above (section 4) that given the altruistic nature of VF committees, it is likely to be difficult to model the determinants of profit. The evidence bears this out. Table 18 presents the results of an endogenous switching model (Lokshin & Sajaia 2004; Dutoit 2007), where VFs first decide whether or not to borrow to on-lend, and then may set to earning a profit. The idea here is that the profit-generating process in VFs that borrow to on-lend may differ from that of the other VFs, and indeed a formal test shows this to be the case (bottom row of Table 18). The independent variables used here have already been discussed.

The first column in Table 18 shows the OLS estimates, with robust standard errors, of a model where any variables with a p-value below 0.2 have been excluded, one by one. Given that we do not have strong prior beliefs about which independent variables are essential, the main advantage of this approach is that it allows one to use a larger sample that would be possible if all the variables were included. In practice, in almost all cases, variables that are statistically significant with all the data are also statistically significant in the strippeddown regressions, so the story remains the same.

The most striking feature of the profit equation is the poor fit – the R<sup>2</sup> is just 0.014 – which is what we would expect if VFs are altruistic, so profit is low and largely random. If anything, profit is lower in villages where households are more affluent – perhaps the demand for VF loans is lower – and the initial VF funding is greater (which may lower the incentive to need to generate equity internally).

Table 18 also shows the results of an endogenous switching regression. The idea here is that VFs that borrow to on-lend may be qualitatively different from those that do not; but that the decision to borrow to on-lend is itself endogenous – much as a wage rate cannot be dissociated from the decision to earn a wage in the first place. An initial probit model allocates observations models the allocation of observations to two groups, here VFs that do, and do not, borrow to on-lend; it then generates Mills ratios that are used in the second-stage equations to correct for potential selection bias. The p-value for the test of the appropriateness of endogeneity is 0.055, which helps justify taking this approach. While the switching component of the model is strong – the probit coefficients are shown in the right hand column of Table 18, and are strongly influenced by the variables that measure VF attitudes toward risk – the equations that try to explain profit are quite inconclusive. We also analyzed the model using TreeNet, but found little evidence of unsuspected nonlinearities or interactions (TreeNet 2011). In short, we conclude that profit is difficult to explain, and we interpret this as evidence that profit maximization is not the objective of most VFs.

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