Efficiency Wage and Productivity in the Indian Microfinance Industry: A Panel Evidence

Abstract

Enhanced productivity remains a crucial agenda for firms to attain cost and competitive advantages in the market. Hence, the main purpose of this study is to investigate the effects of efficiency wage (EW) on the productivity of microfinance institutions (MFIs) with respect to their dual objectives, namely, outreach (depth and breadth) and financial sustainability. Unbalanced panel data of 179 Indian MFIs were collected over the period 2010–2018 from the Microfinance Information Exchange (MIX) market platform (now obtainable from the World Bank catalogue). Under a static model setting (fixed effects model), the observed relationship between EW and MFI’s productivity is mixed. On the one hand, EW exhibits a strong and statistically significant positive relationship with the breadth of outreach, even after considering various control variables and alternative proxies of EW. On the other hand, EW shows no positive influence on the MFIs’ depth of outreach; rather, it results in a mission drift of MFIs, with the poorest of the poor being neglected (weak and insignificant for proxy of EW). Concerning the financial sustainability of MFIs, EW exhibits a positive and statistically significant effect, except for the profitability dimension when an alternative proxy of EW is used. A two-step system generalized method of moments (GMM) performed to limit endogeneity problems also validates most of our findings. The outcomes of this study could help MFIs’ managers in designing appropriate financial packages to enhance MFIs’ productivity and subsequently attain the dual objective of outreach and sustainability.