Controlling For Self-Selection Bias In Evaluating The Impact of Microcredit Programs: Evidence from Asa Bangladesh

Abstract

Endogeneity problems such as self-selection and program placement bias are key issues in estimating the impact of microcredit programs. Self-selection problem occurs when borrowers select themselves in the program because they might have entrepreneurial skills, and risk taking abilities. Hence they could do better even without the credit. And, program placement bias occurs when a branch of microfinance institution placed in a developed village in order to become financially sustainable. This study focuses on overcoming these two biases while estimating the role of microcredit in alleviating poverty in Bangladesh. This study empirically estimates Foster-Greer-Thorbecke (FGT) poverty measures which are: incidence of poverty, poverty gap and squared poverty gap. To achieve the objectives of the study, primary data were collected from 2,598 households during the period of June 2014 to September 2014. The survey covers 24 districts out of 64 districts in Bangladesh. In addition to current borrowers, four types of control groups, non-borrowers, drop-outs, refused and pipeline borrowers, were interviewed to control for potential self-selection bias. The results of the FGT poverty measures indicate that the incidence of poverty, poverty gap and squared poverty gap are the lowest among borrowers. Then, this study applies fixed-effect logistic regression for measuring the impact of microcredit on the incidence of poverty and fixed-effect Tobit regression for estimating the poverty gap and squared poverty gap. In the empirical estimations, this study controls for age and education of the head of households, female (spouse) education, and age and gender composition of the household members. The results suggest that microcredit borrowers are less likely to be poor after being involved in the program. The results also indicate that microcredit program reduces poverty gap and squared poverty gap by respectively 3.3 and 1.2 percent even after controlling for self-selection and program placement bias. Therefore, this study claims that microcredit is an effective tool for poverty reduction.