Contract Structure, Risk-Sharing, and Investment Choice

• Autores: Greg Fischer
• Localización: Econométrica: Journal of the Econometric Society, ISSN 0012-9682, Vol. 81, Nº 3, 2013, págs. 883-939
• Idioma: inglés
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• Dialnet Métricas: 1 Cita
• Resumen

  • Few microfinance-funded businesses grow beyond subsistence entrepreneurship. This paper considers one possible explanation: that the structure of existing microfinance contracts may discourage risky but high-expected-return investments. To explore this possibility, I develop a theory that unifies models of investment choice, informal risk-sharing, and formal financial contracts. I then test the predictions of this theory using a series of experiments with clients of a large microfinance institution in India. The experiments confirm the theoretical predictions that joint liability creates two potential inefficiencies. First, borrowers free-ride on their partners, making risky investments without compensating partners for this risk. Second, the addition of peer-monitoring overcompensates, leading to sharp reductions in risk-taking and profitability. Equity-like financing, in which partners share both the benefits and risks of more profitable projects, overcomes both of these inefficiencies and merits further testing in the field.