Insurance for the poor, called microinsurance, has recently drawn the attention of practitioners in developing countries. There are common problems among the various schemes: (1) low take‐up rates, (2) high claim rates, and (3) low renewal rates. In the present paper, we investigate take‐up decisions using household data collected in Karnataka, India, focusing on prospect theory, hyperbolic preference, and adverse selection. Prospect theory presumes that people behave in a risk‐averse way when evaluating gains but in a risk‐loving way when evaluating losses. Because insurance covers losses, the risk‐loving attitude toward losses might explain the low take‐up rates, and we find weak empirical support for this. Households with hyperbolic preference were more likely to purchase insurance, consistent with our theoretical prediction of demand for commitment. We also find some evidence on the existence of adverse selection: households with a higher ratio of sick members were more likely to purchase insurance.

“Microfinance revolution” is the term often applied to the successful expansion of small‐scale financial services to the poor with high repayment records in developing countries. The present paper investigates the extent to which the microfinance revolution is truly revolutionary. More specifically, it explores the impact of microfinance institutions on the poor, the mechanisms underlying high repayment rates and their innovations, and the new challenges microfinance institutions are currently facing. Different from the existing published survey literature, we focus on current topics and attempt to show recent theoretical developments in a comprehensive manner using simplified models with very similar settings. We contend that microfinance is developing in a promising direction but has yet to reach its full potential.

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Recent empirical studies reveal that effectiveness of aid on growth is ambiguous. This paper considers aid proliferation -excess aid investment relative to recurrent cost -as a potential cause that undermines aid effectiveness, because aid projects can only produce sustainable benefits when sufficient recurrent costs are disbursed. We consider the donor's budget support as a device to supplement the shortage of the recipient's recurrent cost and to alleviate the misallocation of inputs. However, when donors have self-interested preferences over the success of their own projects to those conducted by others, they provide insufficient budget support relative to aid which results in aid proliferation. Moreover, aid proliferation is shown to be worsened by the presence of more donors.

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