Financial Exclusion and the Cost of Incomplete Participation

In this study, we identify a general functional form representing the cost of financial intermediation (as shown for CO2 abatement costs by Nordhaus, The Energy Journal, 2009) with the aim of capturing the cost inefficiencies arising from financial exclusion (“incomplete participation”). We also conduct a preliminary application of the incom- plete participation model and, using the 2008 Microfinance Information Exchange (MIX) market dataset, compute the cost penalty factor associated with different finan- cial institutions’ outreach to financially excluded clients.