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An Economic Framework for Understanding Micro-Credit in Developing Countries

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  • Turvey, Calum G.
  • Kong, Rong

Abstract

To reduce vulnerability and food insecurity this paper investigates the economics of micro-credit. We provide a model that shows how a micro-credit market based on trust can co-exist with a commercial collateral-based market. This model is developed in detail and certain propositions are supported using dominant strategies in a trust-honour game based on the prisoner's dilemma. From a policy point of view the theoretical model indicates that trust-based lending, coupled with certain incentives, can go far in supporting growth opportunities in developing countries. It is argued that development policy should be flexible enough to permit trust-based micro-lending to the poor, regardless of how counter-intuitive this must appear to the conventional wisdom.

Suggested Citation

  • Turvey, Calum G. & Kong, Rong, 2007. "An Economic Framework for Understanding Micro-Credit in Developing Countries," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon 9929, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea07:9929
    DOI: 10.22004/ag.econ.9929
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    Financial Economics;

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