Doing Well by Doing Good? Empirical Evidence from Microfinance

This paper proposes novel identification techniques to examine the trade-offs that microfinance institutions face between increasing their profits and their social impact. It uses a quantile regression approach to examine how these trade-offs evolve as institutions become more commercialized. The identification strategy is based on an instrumental variable approach, and also leverages the heteroskedasticity in the sample. The findings indicate that increasing outreach to women, a common proxy for social impact, has a positive effect on the financial performance of all institutions across different stages of commercialization. This suggests that there is no trade-off between doing well and doing good. However, the price differential that microfinance institutions can maintain with respect to their competitors becomes more important for them as they become more commercialized. If this price differential is not explained by a better quality of the services provided, this result questions whether microfinance institutions that have reached a high level of commercialization can still do well and do good. The results are robust to potential sample selection biases, and are consistent for different measures of financial performance.