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Microfinance institutions must charge an interest rate of 38% APR (compared to a baseline 17.5% APR) to break even under adverse selection; if moral hazard elasticity exceeds 0.46, no zero-profit separating equilibrium exists at any interest rate.
Linking payouts strictly to third-party automated rain gauges eliminated individual claims verification costs and completely removed moral hazard and adverse selection incentives.
The maximum moral hazard repayment elasticity tolerable for a viable grace period loan product is 0.46 under adverse selection (and 0.80 without adverse selection); empirical literature benchmarks (Karlan & Zinman 2009) indicate real-world moral hazard elasticities often reach ~1.6%, explaining why commercial MFIs cannot offer grace period loans at market rates.