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Incentives and Competition in Microfinance

Author

Listed:
  • Kaniska Dam
  • Prabal Roy Chowdhuri

    (Division of Economics, CIDE)

Abstract
We develop a model of competition among socially motivated microfinance institutions (MFIs), where the MFIs offer repayment-based incentive contracts to credit agents. The agents gather information regarding a borrower, and may, or may not collude with the borrower, taking bribes in return for not acting upon their information in case of collusion. We show that competition may either increase, or decrease incentives, with incentives becoming less high powered if the MFIs are not too motivated. Further, whenever either the moral hazard problem is relatively severe and/or the MFIs are not too motivated, competition increases default, thus providing a possible explanation for the recent episodes of crisis in the MFI sector. Interestingly, the effects of competition are linked to mission drift, i.e., whether the MFIs in the concerned countries are more, or less motivated. Further, default problems may worsen in case competition is accompanied by greater access to donor funds.

Suggested Citation

  • Kaniska Dam & Prabal Roy Chowdhuri, 2015. "Incentives and Competition in Microfinance," Working Papers DTE 579, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte579
    as

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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE579.pdf
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    References listed on IDEAS

    as
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    Keywords

    Microfinance; competition; collusion; staff incentive schemes; monitoring.;
    All these keywords.

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