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Research related to:  Finance

Financial development and occupational choice: Evidence from India

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Theory suggests that capital market frictions might inhibit entrepreneurship, and that financial market development is likely to be associated with an increase in self-employment. But what are the effects of increasing access to finance in developing countries where the bulk of the self-employed work in micro-enterprises? Evidence from a large survey of over one million randomly selected Indian households suggests that opposite effects may be observed . . . 
By: Rajeev Dehejia, and Nandini Gupta

Banks and Microbanks

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We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.
Robert Cull, Asli Demirgüç-Kunt and Jonathan Morduch

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

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Regulation allows microfinance institutions to take deposits and expand their banking functions, but complying with regulation can be costly. We examine implications for institutions’ profitability and their outreach to small-scale borrowers and women, using a newly-constructed dataset on 245 leading institutions. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, we find evidence consistent with the hypothesis that profit-oriented microfinance institutions respond to supervision by maintaining profit rates but curtailing outreach to women and customers that are costly to reach. Institutions with a weaker commercial focus instead tend to reduce profitability but maintain outreach.
Jonathan Morduch, Robert Cull, and Asli Demirgüç-Kunt

Selective Knowledge: Reporting Biases in Microfinance Data

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nswering surveys is usually voluntary, yet much of our knowledge depends on the willingness of households and institutions to answer. We explore the implications of voluntary reporting on knowledge about microfinance. We show systematic biases in microfinance institutions’ choices about which survey to respond to and which specific indicators to report. The analysis focuses on data for 2,072 microfinance institutions . . .
Jonathan Morduch and Jonathan Bauchet

Microfinance Games

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Microfinance banks use group-based lending contracts to strengthen borrowers’ incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack micro nance mechanisms through ten experimental games played in an experimental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts bene t borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, especially the most risk averse . . . 

Getting Climate-Related Conditionality Right

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Conditionality has gotten a bad name in development finance. But it may be rehabilitated by the emerging climate change regime. Mitigating climate change by reducing emissions of greenhouse gases (GHGs) from developing countries will require substantial amounts of capital. Some of that capital will come from individuals or organizations who insist that their funds be used in ways that tend to promote mitigation. In other words, they will insist on conditionality. This raises a number of policy concerns, including several that are reminiscent of debates about conditionality in other contexts . . . 
Kevin Davis, NYU and Sarah Dadush, NYU

U.S. Environmental Regulation and FDI: Evidence from a Panel of U.S. Based Multinational Firms

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This paper measures the response of U.S. based multinational firm to the Clean Air Act Amendments (CAAA), which dramatically strengthened U.S. environmental regulation. Using a panel of firm-level data over the period 1966-1999, I estimate the effect of regulation on a multinational’s foreign production decisions. The CAAA induced substantial variation in the degree of regulation faced by firm, allowing for the estimation of econometric models that control for firm-specific characteristics and industrial trends. I find that the CAAA caused regulated multinational firm to increase their foreign assets by 5.3% and their foreign output by 9% . . .