Claudio Gonzalez-Vega

Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia

We construct a theoretical framework that describes the social worth of a microfinance organization in terms of the depth, worth to users, cost to users, breadth, length, and scope of its output. We then analyze evidence of depth of outreach for five microfinance organizations in Bolivia. Most of the poor households reached by the microfinance organizations were near the poverty line - they were the richest of the poor. Group lenders had more depth of outreach than individual lenders. The urban poorest were more likely to be borrowers, but rural borrowers were more likely to be among the poorest.

The design of successful rural financial intermediaries: Evidence from Indonesia

Abstract The success (outreach and sustainability) of eight rural financial intermediation systems in Indonesia, in profitably reaching large numbers of small individual clients, is explained in terms of organizational design. Networks of semiautonomous units use local information and contract enforcement mechanisms to lower transaction costs. Reflecting basic concerns with institutional and financial viability, elements of mechanism design have included compatible incentives such as performance-based compensations (profit sharing, collection fees), efficiency wages (equivalent to quasi-equity), and system monitoring; managerial discretion over transactions conducted at market terms, policies to protect portfolio value, and no dependency-creating subsidies are important. Interventions have been appropriate for the problem at hand.

Corruption and microenterprises in Russia

Abstract In Russia, compliance with the rules and regulations that govern almost all aspects of economic life has created a hostile environment for microenterprises. More serious than the regulations per se, however, is the potential niche they create for opportunistic behavior by regulatory authorities. In Russia, the regulatory state has created a corrupt cadre of government bureaucrats who frequently engage in rent-seeking behavior while enforcing regulations. Firms are not uniformly affected by corruption, however. This paper shows empirical evidence of differential incidence of extortion, based on firm and entrepreneurial characteristics. Corruption in Russia is similar to a regressive tax, and acts as a disincentive to innovation and growth, it may induce technologically inefficient production decisions, and can dilute economies of scale and scope.

Rural poverty, household responses to shocks, and agricultural land use: panel results for El Salvador

This paper addresses factors influencing agricultural land use in rural households in El Salvador, with particular attention paid to the effects of income. Two linkages between the area a household farms and income per capita are critical. First, there is a precautionary demand for land that can be used for subsistence agriculture and this demand declines as income rises. Second, the area a household is able to farm goes up as income increases. Together, these two linkages imply that the relationship between agricultural land use and per capita income takes the shape of an Environmental Kuznets Curve (EKC).Using panel data collected since 1995 in four biennial surveys of a nationally representative sample of rural households, we have analyzed agricultural land use at the household level. Evidence of an EKC relating farmed area to per capita income has been obtained. In addition, other factors influencing a households use of natural resources have been examined.

A dynamic model of individual and group lending in developing countries

This paper examines the contract design problem of microfinance institutions seeking to maximize outreach to the poor while remaining financially sustainable. A dynamic model of group lending is developed that shows how optimal interest rates depend on information regarding moral hazard and adverse selection problems, correlated project risks, and strategic default. Relative to traditional static models, the results indicate a dynamic model better explains the current experience with individual and group lending in developing countries.

The state of microfinance activity and regulation in Russia

This article describes some of the difficulties facing Russian MFIs, such as the absence of a legislative framework giving them the right to make loans and accept savings, and high taxation rates. These challenges are in direct contrast to MFIs operating in most developing countries. The most pressing problem for microfinance activity in Russia is that there is no clear legislative authorization for non-banking institutions to engage in microfinance activities, and some legal authorities question the right of non-banking institutions to engage in lending activities at all. One of the chief difficulties lies in the uneven application and enforcement of existing laws by the relevant local enforcement agencies. Different oblasts (administrative regions) interpret the existing legislation in a variety of ways, and organizations wishing to start a new MFI have to employ lawyers to look into which of a number of different legal forms is preferable in a particular region. Two strategies are proposed: to research...

Uneven Influence of Credit and Savings Deposits on the Dynamics of Technology Decisions and Poverty Traps

Using numerical approximations of infinite-horizon, dynamic, stochastic models of farm-household behavior, we investigate the influence of several dimensions of financial development in overcoming poverty traps, through the sustained adoption of advanced production technologies. We explore decisions for both adopting and abandoning higher-productivity technologies, under different scenarios of inclusion into the credit and the savings deposits markets, for different levels of credit rationing (limits on loan size), and different degrees of financial deepening.The results show that the influence on technology choices of the inclusion into markets for just loans or just deposits is not uniform. Unless loan-size limits are sufficiently nonrestrictive, deposit facilities are a superior intervention to boost rates of technology adoption and prevent its abandonment. While sustained rates of adoption increase with less non-interest credit rationing (larger loan-size limits), they are insensitive to declining loan interest rates. Thus, in cases of non-interest credit rationing, most likely among the poor, subsidized credit would not encourage adoption. In contrast, adoption rates increase and abandonment rates decline with higher interest rates on deposits. The paper also shows that transitioning from an economy with scant financial development to another with full financial development (namely, reducing the gap between loan and deposit interest rates) increases the sustained adoption of advanced production technologies, from 14 to 62 percent of household-farms, under the parameters of the simulation.

Does Social Capital Affect Mortgage Loan Termination by Low-IncomeHomeowners?

We study whether social capital affects low-income borrowers’ decisions to terminate their mortgage loans, originated after church leaders connected these borrowers with a lender. Loan termination is modeled in a competing-risks framework, where social capital, demographic and religious characteristics as well as traditional economic factors affect mortgage termination. We find evidence that heterogeneity of social trust in the wider community is associated with decreased default and prepayment hazards, indicating that low-income borrowers value bridging social capital linking them to the wider community. The evidence suggests a role for social capital in mortgage loans and perhaps other financial contracts.