MICROFINANCE AND GENDER DISCRIMINATION IN CREDIT ALLOCATION: AN ECONOMIC ANALYSIS OF INCENTIVE CONTRACTS

Abstract

In this paper, we develop a model of discrimination by effort between women and men in credit markets. The specificity of our model compared to the current literature consists in the level of effort effected by the agents who benefited of a microcredit is endogenous. We assume that borrowers have financial constraints and that they want to obtain funds to carry out their projects whose success depends on costly and unobservable efforts. Assuming that women exert a higher level of effort than men, we show that when information is perfect, all projects are financed and the collateral is completely eliminated. Women benefit of a lower interest rate than men and at the same time receives a loan of the same amount as men. In a situation of imperfect information, when the level of the project manager’s effort is private information, we show that in a competitive credit market where risks are not mixed, the riskier borrower obtains the same contract as in a perfect situation. When the state can guarantee highrisk borrowers (low efforts), their welfare improves. On the other hand, when government can provide guarantees for lowrisk borrowers (high efforts), it reduces collective welfare.