Micro-finance Competition: Motivated Micro-lenders, Double-dipping and Default

We develop a tractable model of competition among socially motivated MFIs, so that the objective functions of the MFIs put some weight on their own clients' utility. We nd that the equilibrium involves double-dipping, i.e. borrowers taking multiple loans from different MFIs, whenever the MFIs are relatively profit-oriented. Further, double-dipping necessarily leads to default and inefficiency, and moreover, borrowers who double-dip face relatively higher transactions costs and are actually worse off compared to those who do not. Interestingly, an increase in MFI competition can increase the extent of doubledipping and default. Further, the interest rates may go either way, with the interest rate likely to increase if the MFIs are very socially motivated.