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Discussion Paper Details

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Title: (Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance

Author(s): Abhijit Banerjee, Esther Duflo and Richard Hornbeck

Publication Date: September 2014

Keyword(s): development, health insurance, microcredit, microenterprises, microfinance, revealed preference and welfare

Programme Area(s): Development Economics

Abstract: We investigate the puzzle of microfinance: that loans generate large measured returns for businesses, yet loan take-up is low and the businesses often close. We analyze a randomized trial that bundled microfinance loans with a cheap health insurance policy. Requiring clients to purchase insurance substantially lowered loan renewal. The insurance was useless, due to administrative failures, but reduced loan renewal negatively impacted clients? businesses. Clients' decision to incur substantial business losses, rather than pay modest insurance premiums, implies the substantial financial gains from microfinance loans are dissipated by unmeasured costs and provide little net value to microfinance clients.

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Bibliographic Reference

Banerjee, A, Duflo, E and Hornbeck, R. 2014. '(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10146