Seminar 2 (week 9)

1. Interlinked transactions

Consider a situation similar to the one discussed in Ray ch. 14.4.4. A landless laborer can work at a competitive wage w during the peak season, but no work is available during the slack season. The laborer has preferences over consumption in the peak season c_p and consumption in the slack season c_s, given by U(c_p,c_s). U has standard properties.

1. Consider first the case of a monopolistic money lender. The money lender has access to money at an interest rate i. Find the laborer's demand for credit, and derive the optimal interest rate i^** to charge from the laborer. Explain why the outcome is not Pareto optimal.
2. Assume next that the money lender also owns land and want to hire workers. He can hire workers at the market wage w, but another possibility is to propose a contract of both an interest rate i^* and a wage w^*. Show how to design this contract optimally, and discuss whether the outcome is more efficient than the one studied above.

2. Microfinance

1. Explain what microfinance is and what distinguishes it from ordinary bank loans or moneylender operations.
2. Discuss how we should judge whether a microfinance institution is successful or not. Why could we expect microfinance loans to be more successful than loans from ordinary financial institutions among poor people?
3. Explain why it is difficult to empirically study the impact of microfinance institutions
4. To what extend does the study by Banerjee et al. (2015) overcome these challenges?
5. Discuss the findings in Banerjee et al. (2015) and discuss what conclusions we can draw on microfinance as a vehicle for development

3. Saving

1. Explain first why it may be reasonable that savings markets are less imperfect than credit markets. Next explain why we still may expect savings markets to be imperfect in poor countries (and countries in general).
2. Discuss to what extent ROSCAs can solve these problems