Author: Ratul Lahkar and Viswanath Pingali
In this paper, we model welfare implications of entry of commercial microfinance institutions (MFIs). We initially characterize equilibrium with a sole fund-constrained benevolent credit institution followed by equilibrium with only prot-motivated MFIs. We show that entry of such MFIs can lead to an increase in interest and default and a decline in screening. However, it can still represent a Pareto improvement since: all agents previously denied credit can obtain loans, and existing clients have the option of seeking loans from MFIs. Finally, we model multiple group formation as an equilibrium mechanism, which allows more ecient risk diversication.