Finding the Diamonds in the Rough: Welfare Comparisons of Two Targeting Mechanisms in Microcredit

Published on: 2017-02-14

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Finding the Diamonds in the Rough: Welfare Comparisons of Two Targeting Mechanisms in Microcredit

Abstract

We examine the distributive impacts of two alternative approaches to deliver agricultural credit to smallholders: TRAIL (or trader-agent intermediated lending), where local traders recommend village residents for individual liability micro-loans, and GBL (or group-based lending), where households self-select into groups and receive joint liability loans. We use data from a field experiment in eastern India to estimate how the effects of these schemes differ by households’ economic status (proxied by landownership), and social status (proxied by caste and religion) of households. We find that TRAIL loans increased farm incomes for all land groups, but particularly for landless households. As a result, across land groups, the TRAIL scheme generated significantly greater welfare than the GBL scheme, irrespective of inequality aversion. The GBL scheme generated larger effects among the socially disadvantaged minority groups, so that it had weakly larger welfare effects at high degrees of inequality aversion. This suggests that TRAIL might dominate GBL on both efficiency and equity dimensions when households are differentiated by economic status, but that comparisons are ambiguous when households are differentiated by social group.

This is joint work with Pushkar Maitra, Sandip Mitra and Dilip Mookherjee.

 

About the Speaker

Sujata Visaria is a development economist and an assistant professor in the Department of Economics at HKUST. Her recent and ongoing research studies alternatives to traditional microcredit models, financial choices made by migrant workers, and middlemen margins in agricultural markets. She is an affiliate of the Bureau for Research and Economic Analysis of Development. She serves on the board of directors of the Asian Migrants Credit Union, Hong Kong’s only credit cooperative of and for migrants.

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Sifting grains. Photo by Ray Witlin / World Bank. Flickr. CC. https://flic.kr/p/4jYzsJ

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