IS THE CREDIT WORTH IT? FOR-PROFIT LENDERS IN MICROFINANCE WITH RATIONAL AND BEHAVIORAL BORROWERS

Abstract

The bulk of the literature on microcredit has focused on either not-for-profit lenders or assumes a perfectly competitive, zero-profit market equilibrium. Yet the market has experienced a significant shift toward for-profit lending and the assumptions of perfect competition are likely to be too strong in many locations. We review the state of the literature on for-profit lending in microcredit, consider its implications for both conventionally ‘rational’ borrowers and for borrowers with behavioral biases, and point out directions for future research.