Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324012 
Year of Publication: 
2015
Citation: 
[Journal:] The Quarterly Review of Economics and Finance [ISSN:] 1878-4259 [Volume:] 58 [Publisher:] Elsevier [Place:] Amsterdam [Year:] 2015 [Pages:] 44-55
Publisher: 
Elsevier, Amsterdam
Abstract: 
This paper studies the relationship between a microfinance institution (MFI) and its loan officers when officers discriminate against a particular group of micro-entrepreneurs. Using survey data from Uganda, we provide evidence that loan officers are more biased than other employees against disabled micro-entrepreneurs. In line with the evidence, we build an agency model of a non-profit MFI and a biased loan officer in charge of granting loans. Since incentive schemes are costly and the MFI's budget is limited, the MFI faces a trade-off between combating discrimination and granting loans. We show that the optimal incentive premium is a non-decreasing function of the MFI's budget. Moreover, even a non-discriminatory welfare-maximizing MFI may let its loan officer discriminate, because eradicating discrimination would come at the cost of too many loans. Observing an MFI's loan allocation biased against a minority group therefore does not imply that the institution is biased against this group.
Published Version’s DOI: 
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)
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