(Measured) Profit is Not Welfare: Evidence from an Experiment on Bundling Microcredit and Insurance

We analyze a randomized trial in which microfinance loans were bundled with an unpopular (but cheap) health insurance policy. In randomly assigned treatment villages, purchase of the insurance policy was made mandatory at the time of loan renewal. This requirement led to a 22 percentage point (or 31%) decline in loan renewal in treatment villages, compared to control villages where the insurance policy was not introduced. The insurance policy itself turned out to be useless, partly due to administrative failures in implementation. Therefore, non-renewing clients' valuation of microfinance is approximated by the modest fee to purchase the insurance; in the presence of any expected gains, the fee represents an upper bound. Comparing client businesses in treatment and control villages, however, the decline in loan renewal had negative impacts that were both economically substantial and statistically significant. Clients' decision to incur these losses, rather than pay the modest insurance premium, implies the substantial financial gains from microfinance are mostly dissipated by unmeasured costs of operating the small businesses. This result potentially reconciles the seemingly large returns to capital for microenterprises with the lack of growth and frequent business closure.