Working Paper: CEPR ID: DP12659
Authors: Alexey Khazanov; Omer Moav; Zvika Neeman; Hosny Zoabi
Abstract: Recent research indicates that microcredit has not contributed significantly topoverty reduction. Take up of affordable credit by the poor for investment in businesses,education and health, turned out to be very low. We argue that this can be explainedby risk aversion, when investment affects the probability of success of a riskyproject. Our model abstracts from fixed costs in the production technology, commonlyassumed in the existing literature. There are no imperfections in the loan market, andwe abstract from assumptions about false beliefs by the poor regarding the productionfunction or other behavioral assumptions. We conclude that to facilitate investmentand thereby reduce poverty, policy should be aimed at reducing the risk faced by thepoor.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk aversion (D81) | probability of success of risky investments (G11) |
| risk aversion (D81) | underinvestment in high-return opportunities (G31) |
| risk aversion (D81) | corner solution in investment behavior (G11) |
| risk aversion (D81) | choice not to invest (G11) |
| risk aversion (D81) | persistent poverty (I32) |
| risk mitigation (D81) | increased investment (E22) |