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Faculty of Economics

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Klein, T.

Does Anti-Diversification Pay? A One-Sided Matching Model of Microcredit

CWPE1521

Abstract: In many economic situations, market participation requires that agents form groups subject to exogenous rules. Consider a microfinance institution that decides on rules for diversifying borrower groups in terms of their exposure to income shocks. Such rules affect group repayment by influencing both who matches with whom (direct effect) and who participates in the market (participation). I develop the key trade-off for conflicting predictions of extant theoretical models and estimate both effects separately. Group formation creates an endogeneity problem, but a matching model exploits the exogenous variation from counterfactual groups. I find that while diversification has no participation effect it has a significant positive direct effect.

Keywords: microcredit, joint liability risk, diversification, market design, stable matching, endogeneity, selection model, agriculture, Thailand

JEL Codes: C11 C31 C34 C36 C78 C57 D02 D47 D82 G21 O16 Q14

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1521.pdf

Open Access Link: https://doi.org/10.17863/CAM.5812