Non-linearities in returns to participation in Grameen Bank programs

Abstract

This paper studies the benefits of participation in micro-finance programs, where benefits are measured in terms of the ability to smooth the effect of seasonal shocks that cause consumption fluctuations. It is shown that although membership in these programs is an effective instrument in combating inter-seasonal consumption differences, there is a threshold level of length of participation beyond which benefits begin to diminish. Returns from membership are modelled using an Euler equation approach. Fixed effects non-linear least squares estimation of parameters using data from 24 villages of the Grameen Bank suggests that returns to participation, as measured by the ability to smooth seasonal shocks, begin to decline after approximately two years of membership. This implies that membership alone no longer has a mitigating marginal effect on seasonal shocks to per capita consumption after four years of participation. Such patterns suggest that the ability to smooth consumption as a function of length of membership, need not accrue indefinitely in a linear fashion.