The Elasticity Of Demand For Microcredit A Case Study In The Dominican Republic

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The price elasticity of demand for microcredit serves as an essential tool in defining demand for microcredit and subsequently in designing relevant policy and industry products. With the aim of describing consumer preferences for microcredit, this thesis carries two objectives. These are to extract the loan demand schedules and elasticities of borrowers of Esperanza International, a microfinance institution operating in the Dominican Republic, and to then examine the demographic characteristics and borrowing behavior that are correlated with differences in these measures. Using client reactions to changes in monthly interest rates by intervals of one percent per month between zero percent and eight percent, this study finds that demand is heterogeneous but largely linear and downward sloping. We draw a bestfit elasticity measure, and find that borrower demand approaches unit-elasticity at 4 percent monthly interest. These findings contrast with more inelastic estimates of elasticity of demand among the poor and extreme poor in the literature, and furthermore suggest that Esperanza is operating at profit maximizing levels. To examine variation among clients, this thesis models demand elasticity as a function of demographic characteristics, business profile, personal financial behavior, and borrowing history as recorded by Esperanza. Ordinary least squares and tobit regression results indicate that clients who were more comfortable taking risks in order to increase profits and who have acquired vocational training exhibit more elastic demand. In contrast, clients who derive the majority of their income from wage labor, those who are at the onset of developing their business, those who consider themselves credit rationed, and those who were able to recall the interest rate on their loan emerge with significantly more inelastic demand. These findings suggest that entrepreneurial drive or skill level, financial literacy, and cultural dissimilarities are correlated with the price elasticity of demand for microcredit and call for further study

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