Microcredit contract design: A macroeconomic evaluation

Abstract

Abstract There is now a vast literature investigating the impact of microcredit on poverty in the developing world. Such studies are by and large at the micro-level – investigating the impact of the provision of microcredit loans or a feature of microcredit contracts for a specific microfinance institution (MFI) on measures of well-being such as poverty or female empowerment. While these studies are crucial for understanding the effectiveness of microcredit in various contexts, very little analysis has been at the macroeconomic level with a view to understanding the general equilibrium effects of microfinance. This paper does this, by providing a comprehensive theory that allows the relative importance of the various factors influencing microcredit’s impact to be quantified. We build on Buera et al. (2012) and develop a model of financial intermediation which highlights the roles of credit market imperfections, MFI efficiency and occupational choice. We exploit the large cross-country variation in microcredit features to decipher the important features of microcredit contracts, calibrating the model to data for 21 countries in the early 2000s. We then use the calibrated model to investigate the impact of a number of counterfactual scenarios which may lend insight into microcredit policy, such as training for microcredit clients, credit information-sharing and microcredit itself. We investigate the impact of each policy experiment on poverty, income per capita and entrepreneurship. This paper highlights that the impact of credit policies differs significantly across countries, and therefore that no credit-based policy is a panacea for improving welfare.