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File2-page114 - Morduch(1999& Microfinance Literature...

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Unformatted text preview: Morduch (1999) & Microfinance Literature Credit and Microfinance Only by affecting distribution of endowments can we get permanent increases in welfare – tax/transfer mechanisms can help households deal with crisis situations but if don’t change distribution of endowments then no effects on permanent income – idea of poverty traps being caused by market failure and the importance of redistribution of opportunity in these contexts has led to complete rethinking of design of public policy to affect poverty and growth in developing countries – need more empirical work to establish which policies work and which don’t In the context of this lecture, if we believe that imperfections in the credit market is a major factor behind why poor people stay poor, then we have to ask ourselves, what can be done? 6.1 Morduch (1999) & Microfinance Literature Types of Information Problems in a Credit Market Adverse Selection: Ascertaining the borrower’s risk type. Borrower invests and thus initiates the project Moral Hazard: Ensuring that the borrower exerts high effort. Project concludes and its outcome (s, f ) is realised Auditing: Verifying the project’s outcome Enforcement: Forcing the borrower to repay Adverse Selection Literature ◦ Stiglitz-Wiess (1981) Underinvestment: Safe borrowers are unable to borrow for projects that are socially viable ◦ De Mezza-Webb (1987) Overinvestment: Risky borrowers are able to borrow for projects that are not socially viable Group Lending: Adverse Selection ◦ Ghatak (1999, 2000) Peer Selection Effect in Group Lending: Joint Liability contract leads to positive assortative matching within groups Development Economics, LSE Summer School 2007 111 ...
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