LICOS - Discussion paper series 349/2014 pages:1-31
Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of
strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that,there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our
model in terms of price caps, market entry and outreach measurement.