2006a). "Credit Elasticities in Less Developed Economies: Implications for Microfinance," working paper

Microcredit fights poverty by expanding access to credit. Some microfinance institutions (MFIs) focus on maximizing profits, and do so while lending to the poor. Others seek to maxi-mize access for the poor subject to a budget constraint. Regardless, nearly all MFIs face pressure from policymakers, donors, and investors to eliminate their reliance on subsidies. Economic modeling, policy, and practice suggest that loan pricing is critically related to reli-ance on subsidies, and to the functioning of credit markets more generally. Yet existing research offers little evidence on interest rate sensitivities in MFI target markets, and little methodologi-cal guidance on how to derive optimal rates. Instead, MFIs and policymakers rely heavily on descriptive evidence and intuition. Policymakers often presume that the poor are largely insensi-tive to interest rates, and then prescribe that MFIs should increase rates without fear of reducing The most comparable study is Rajeev Dehejia, Heather Montgomery, and Jonahtan Morduch (005), which exploits quasi-experimental variation from a pricing policy change by a Bangladeshi nonprofit MFI, and finds full-sample elas-ticities ranging from 20.73 to unity. There has been similarly little work on estimating the price elasticity of demand for credit in developed countries. Exceptions include Rob Alessie, Stefan Hochguertel, and Guglielmo Weber (005) on consumer loan borrowers in Italy; David B. Gross and Nicholas S. Souleles (00) on credit card holders in the United States; and Orazio P. Attanasio, Pinelopi K. Goldberg, and Ekaterini Kyriazidou (forthcoming) on car loan borrowers in the United States. Each of these studies exploits quasi-experimental variation from government or business policy rules. Randomized controlled trials are standard practice among many US credit card companies, but the results of these experiments are rarely made public (George S. Day 003). Lawrence M. Ausubel (999) is the only exception we know of, and it focuses largely on repayment effects, not on net profits and optimal pricing implications