Geographical Distance and Moral Hazard in Microcredit: Evidence from Colombia

Recent years have seen an intense and critical debate about the impact of microcredit on entrepreneurial activities and poor households’ welfare. This paper suggests that information
asymmetries in the ex-post loan arrangement between the microfinance institution (MFI)
and local borrowers could partially explain the limited impact of microcredit. The physical distance separating borrowers from the MFI could be considered as a proxy of agency costs,
increasing the costs of monitoring and easing moral hazard. The estimation of the effect
of distance on the borrower’s self-assessed outcome of a microcredit project in Colombia
confirms the presence of moral hazard in the microcredit market, with agency costs increasing
with geographical distance.