Is informality a barrier to financial development?

This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999-2007 we also provide empirical support for the mechanism of our theory

E-Payment Technology and Business Finance:A Randomized Controlled Trial with Mobile Money (revision of CentER DP 2019-032)

We conducted a randomized controlled trial with small and medium-sized enterprises in Kenya to estimate the causal impact of an e-payment technology on business finance. Using an encouragement design, we exogenously increased e-payment usage among a random subset of firms by relaxing adoption transaction costs and information barriers. Sixteen months after the intervention, we find that the e-payment technology increased access to mobile loans (in number of loans, as well as in the amount borrowed) by at least 50% (0.17 sd), likely due to the reduction of information asymmetries brought by an increase in digital transactions. We find no effect of the e-payment technology on sales and profits, but we do find a reduction of sales volatility and precautionary investment, especially for smaller firms. This suggests that mobile loans help smaller firms cope with short-term negative shocks. We provide a stylized model of business finance that rationalizes these findings

Transparency and Financial Inclusion:Experimental Evidence from Mobile Money (revision of CentER DP 2018-042)

Electronic payment instruments have the potential to spur the transparency of business transactions and thereby reduce information frictions. We design a field experiment to understand whether e-payments facilitate the financial inclusion of SMEs in developing world and to study adoption barriers. We encourage a random sample of Kenyan merchants to adopt a new mobile-money payment instrument and find that the decision to adopt is hampered by the combination of information, know-how and seemingly small transaction costs barriers. In addition, we nd that business owners who are more averse to transparency are more reluctant to adopt. Sixteen months after the intervention, we observe that treated firms have better access to finance in the form of mobile loans. The impact on financial access is more pronounced for smaller establishments, which also experience a considerable reduction in sales volatility. We conclude that e-payments can help un-collateralized firms become transparent and get financially integrated

Payment Technology Adoption by SMEs:Experimental Evidence from Kenya's Mobile Money

This paper reports the results from a field experiment conducted in Kenya to investigate the adoption determinants of a profitable financial technology by small and medium sized enterprizes (SMEs). We offered a randomly selected sample of restaurants and pharmacies the possibility to sign up, on their behalf, for a novel mobile-money technology called Lipa Na M-Pesa, which allows an efficient mobile-money based transaction between a business and a customer. A key feature of Lipa Na M-Pesa is that it is profitable, it does not involve any risk, and it has no registration fee. Our intervention eliminates the transaction costs associated with the adoption of the technology. We find that over a 60% of the restaurants owners/managers decided to sign up for this new technology, while the adoption rates turned out to be about 20% among pharmacies. The high take-up rate in restaurants shows that the small barriers that we released were preventing the adoption of this technology. We use our detailed survey to shed light on the reasons for not adopting the technology and we find that neither risk, time preferences or trust are important predictors. We hypothesise that status quo bias may be a plausible internal barrier underlying these decisions

Payment instruments, finance and development

This paper studies the effects of a payment technology innovation (mobile money) on entrepreneurship and economic development in a quantitative dynamic general equilibrium model. In the model mobile money dominates fiat money as a medium of exchange, since it avoids the risk of theft, but comes with electronic transaction costs. We show that entrepreneurs with higher productivity and access to trade credit are more likely to adopt mobile money as a payment instrument vis-a-vis suppliers. Calibrating the stationary equilibrium of the model to match firm-level data from Kenya, we show significant quantitative implications of mobile money for entrepreneurial growth and macroeconomic development

Joint-liability with endogenously asymmetric group loan contracts

Group lending is a common practice that Microfinance Institutions (MFIs) utilize when lending to individuals without collateral. We develop a multi-agent principal-agent model with costly peer monitoring and solve for the optimal group loan contract. The optimal contract exhibits (i) a joint-liability scheme; and, (ii) asymmetric loan terms which can be interpreted as appointing a group leader, who has strong incentives to monitor her peer. Relaxing the joint-liability scheme implies the breakdown of equilibrium monitoring. When the contractual asymmetry is relaxed, the peer-monitoring game exhibits multiple Nash equilibria: a (weak) good equilibrium at which borrowers monitor each other and a (strong) bad equilibrium without monitoring. This key result suggests that profit maximizing MFIs should provide asymmetric group loan contracts - even to a homogeneous group of borrowers - to ensure stability in repayment rates

Preference heterogeneity and optimal monetary policy

We study optimal policy design in a monetary model with heterogeneous preferences. In the model, financial markets are incomplete and households are heterogeneous with respect to their current consumption preferences and discount factors. The government controls the supply of money (liquid) and nominal bonds (illiquid), and households make optimal portfolio choices. We uncover that the two types of preference heterogeneity have distinct distributional consequences and different implications for the optimal monetary policy. While the heterogeneity in current consumption preferences pushes the economy towards a zero lower bound (ZLB) associated with nominal interest rates, the heterogeneity in discount factors moves the economy away from the ZLB. We characterize the optimal policy design and quantify the welfare losses associated with a binding ZLB - and thus also the potential welfare benefits of being able to implement negative interest rates.ISSN:0165-1889ISSN:1879-174

Leverage, bank employee compensation and institutions

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures