Abstract
The focus of this paper is on the alleged shift of microfinance programs from targeting poor borrowers towards wealthier clients and profitability. In a simple moral-hazard setting, we determine the equilibrium financial contracts offered by a for-profit and a not-for-profit microfinance institution (MFI). We show that: i) with a for-profit MFI, mission drift does not necessarily occur if borrowers are offered a combination of individual and joint liability contracts; ii) with a not-for-profit MFI, poor individuals are never crowded out by wealthier entrepreneurs.
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