Information, the Cost of Credit, and Operational Efficiency: An Empirical Study of Microfinance

Abstract

We provide direct evidence on the impact of asymmetric information on both financing and operating activities through a study of credit evaluations of microfinance institutions (MFIs). We employ a regression discontinuity model that exploits the eligibility criteria of an evaluation subsidy offered by a nonprofit consortium. Evaluations dramatically cut the cost of financing. This effect is strongest for commercial lenders and for short-term MFI–lender relationships. The impact of evaluations on the supply of finance is mixed. Evaluated MFIs lend more efficiently, extending more loans per employee.