An Economic Framework for Understanding Micro-Credit in Developing Countries

To reduce vulnerability and food insecurity this paper investigates the economics of micro-credit. We provide a model that shows how a micro-credit market based on trust can co-exist with a commercial collateral-based market. This model is developed in detail and certain propositions are supported using dominant strategies in a trust-honour game based on the prisoner’s dilemma. From a policy point of view the theoretical model indicates that trust-based lending, coupled with certain incentives, can go far in supporting growth opportunities in developing countries. It is argued that development policy should be flexible enough to permit trust-based micro-lending to the poor, regardless of how counter-intuitive this must appear to the conventional wisdom.


Issue Date:
2007
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/9929
Total Pages:
19
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-08-23

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