Households' Time Allocation to Micro Credit

This paper presents two models in explaining time allocation to micro credit (MC) by households in North America. The single-period model explains the optimal allocation of time to a microenterprise in any given period, conditional on the household having self-selected into the MC program. A household’s time allocation is negatively affected by its wage in paid employment, its degree of risk aversion, and its relative preference for leisure. The multi-period model explains the household’s decision to self-select into the MC program. This decision is anchored on the sequential lending attribute of most MC programs. Sequential lending means that a household’s current use of MC gives it access to greater funds in the future. The likelihood of self-selecting into the program is positively influenced by the size of the micro credit loan, the future streams of loans anticipated from current participation, the rate of appreciation of the investment over time as well as the household’s discount factor. This likelihood is negatively influenced by the households’ wage rate in paid employment and the costs of borrowing. Under certain conditions, the household – in a bid to access a future loan – would borrow money in the short run and repay it without having invested it in a microenterprise. Implications for the demand for MC in North America are discussed.