Incentive

Joint and several liability

Moral hazard

Financial system

Microfinance

Microeconomics

Economics

Market economy

Business

Monetary economics

Outreach

Profitability index

Tort

Liability

Economic growth

Finance

Profit (economics)

Economic Modelling

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.

The trade-off between profitability and outreach in microfinance