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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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This note was uploaded on 12/29/2011 for the course ECO 307 taught by Professor Dublin during the Spring '10 term at SUNY Stony Brook.
- Spring '10