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Competition between microfinance institutions (MFIs) in developing countries has increased dramatically in the last decade. We model the behavior of non-profit lenders, and show that their non-standard, client-maximizing objectives cause them to cross-subsidize within their pool of borrowers. Thus when competition eliminates rents on profitable borrowers, it is likely to yield a new equilibrium in which poor borrowers are worse off. As competition exacerbates asymmetric information problems over borrower indebtedness, the most impatient borrowers begin to obtain multiple loans, creating a negative externality that leads to less favorable equilibrium loan contracts for all borrowers.


NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Development Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in: Craig McIntosh, Bruce Wydick. Competition and Microfinance. Journal of Development Economics (December 2005), vol. 78, no. 2, pp. 271-298.

Presented at Princeton University, December 2002, WEA Meetings in Seattle, July 2002, UC Davis, May 2002, and presented by McIntosh at UC Berkeley.



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