Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?

In 1980, India nationalized its large private banks. This induced different bank ownership patterns across different towns, allowing credible identification of the effects of bank ownership on financial development, lending rates, and the quality of intermediation, as well as employment and investment. Credit markets with nationalized banks experienced faster credit growth during a period of financial repression. Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services. Development lending goals were met, but these had no impact on the real economy.

Unpacking the causal chain of financial literacy

A growing body of literature examines the causal impact of financial literacy on individual, household, and firm level outcomes. This paper unpacks the mechanism of impact by focusing on the first link in the causal chain. Specifically, it studies the experimental impact of financial literacy on three distinct dimensions of financial knowledge. The analysis finds that financial literacy does not immediately enable individuals to discern costs and rewards that require high numeracy skills, but it does significantly improve basic awareness of financial choices and attitudes toward financial decisions. Monetary incentives do not induce better performance, suggesting cognitive constraints rather than lack of attention are a key barrier to improving financial knowledge. These results illuminate the strengths and limitations of financial literacy training, which can inform the design and anticipated effects of such programs.Financial Literacy,Education For All,Access&Equity in Basic Education,Access to Finance,Primary Education

The Value of Advice: Evidence from Mobile Phone-Based Agricultural Extension

Attempts to explain the astonishing differences in agricultural productivity around the world typically focus on farm size, farmer risk aversion, and credit constraints, with an emphasis on how they might serve to limit technology adoption. This paper takes a different tack: can managerial practices explain this variation in productivity? A randomized evaluation of the introduction of a mobile-phone based agricultural consulting service, “Avaaj Otalo (AO)” to cotton farmers in Gujarat, India, reveals the following. Demand for agricultural advice is high, with more than half of farmers calling AO in the first seven months. Farmers offered the service turn less often to other farmers and input sellers for agricultural advice. Management practices change as well: we observe an increase in the adoption of more effective pesticides, and reduced expenditure on less effective and hazardous pesticides. Treated farmers also sow a significantly larger quantity of cumin, a lucrative but risky crop. Interestingly, use of the service is increasing in the level of farmer education, but education levels do not affect the size of treatment effects. Farmers appear willing to follow advice without understanding why the advice is correct: the average respondent does not demonstrate improved agricultural knowledge, though there is some evidence educated farmers learn from the service

Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk assessment and lending decisions. We first show that while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance

Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. We first show that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance

Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

This paper estimates how experimentally-manipulated experiences with a novel financial product, rainfall index insurance, affect subsequent insurance demand. Using a seven-year panel, we develop three main findings. First, recent experience matters for demand, consistent with overinference from small samples. Second, spillovers also matter, in the sense that the recent payout experience of village co-residents affects insurance demand about as much as one's own recent payout experience. Third, the spillover effect decays as time passes while the effect of one's own experience does not. We discuss implications of this analysis for commercial sustainability of this complicated but promising risk management technology

How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment

Weather is a key source of income risk for many firms and households, particularly in emerging market economies. This paper studies how an innovative risk management instrument for hedging rainfall risk affects production decisions among a sample of Indian agricultural firms, using a randomized controlled trial approach. We find that the provision of insurance induces farmers to shift production towards higher-return but higher-risk cash crops, particularly amongst more-educated farmers. Our results support the view that financial innovation may help mitigate the real effects of uninsured production risk. In a second experiment we elicit willingness to pay for insurance policies that differ in their contract terms, using the Becker-DeGroot-Marshak mechanism. Willingness-to-pay is increasing in the actuarial value of the insurance, but substantially less than one-for-one, suggesting that farmers’ valuations are inconsistent with a fully rational benchmark

Essays on development and finance

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2005."June 2005."Includes bibliographical references.This thesis is a collection of three empirical essays on economic development and finance. Chapter 1 examines how politicians influence the lending decisions of government owned- banks, particularly whether government resources are used to achieve electoral goals. Theories of electoral competition predict how politicians may allocate resources to win elections: distributing more resources prior to election years, and targeting these resources towards "close" races. I find strong evidence of manipulation in agricultural lending by government banks. More credit is lent just prior to election years. Moreover, this spike is most pronounced in districts in which the previous election was close. I document that these distortions are costly: repayment rates vary with the electoral cycle, while output does not. Chapter 2 tests theories of public and private ownership of banks. In 1980, the government of India nationalized some private banks while leaving similar banks in private hands. Using a regression discontinuity design, I find that government owned banks grew less quickly and lent more to agriculture. These differences manifest themselves in outcomes across credit markets in India as well. Villages whose banks were nationalized received a substantial increase in agricultural and total credit, at lower interest rates, than villages whose banks were not. Strikingly, the additional credit had no effect on real agricultural outcomes, and may have hurt employment in trade and services. Chapter 3 investigates the economics of manumission, a process whereby a slave purchases her own freedom. Using newly collected data from Louisiana, I first paint a qualitative and quantitative portrait of manumission.(cont.) I then answer the question of whether slaves purchasing their freedom paid above market prices. Legal changes following the Louisiana Purchase allow me to conclude that manumission laws were quite important in determining the terms at which manumission agreements were struck: when slaves lost the right to sue for self-purchase at market price, there was a precipitous drop in the number of manumissions, while prices paid increased.by Shawn Cole.Ph.D

Determining the Value of UAVs in Iraq

As areas of Iraq and Syria controlled by ISIS are liberated, internally displaced persons (IDP) are returning to their homes to face widespread destruction and contamination from deadly improvised explosive devices (IED) implanted by ISIS to maim, kill, and terrorize. Janus Global Operations (Janus) currently operates throughout Iraq, clearing IEDs with a focus on bringing critical infrastructure online to allow IDPs to return safely and resume their lives. Operating in urban environments has proven challenging due to the high volume of destroyed buildings and associated rubble. In urban environments, operators are exposed to uncertain situations when traditional detection methods can be dangerous. Among the primary goals of industry best practices is to protect operators by limiting their exposure to explosive remnants of war, including IEDs. In a destroyed factory, small copper crush wires, which ISIS has used extensively for victim-activated IEDs, can be difficult to detect, and exposing operators to this threat is unacceptable. Situations like this drive new innovations in search and clearance operational technology to protect operators by more safely finding and disrupting IEDs

Do Voters Demand Responsive Governments? Evidence from Indian Disaster Relief

Using rainfall, public relief, and election data from India, we examine how governments respond to adverse shocks and how voters react to these responses. The data show that voters punish the incumbent party for weather events beyond its control. However, fewer voters punish the ruling party when its government responds vigorously to the crisis, indicating that voters reward the government for responding to disasters. We also find evidence suggesting that voters only respond to rainfall and government relief efforts during the year immediately preceding the election. In accordance with these electoral incentives, governments appear to be more generous with disaster relief in election years. These results describe how failures in electoral accountability can lead to suboptimal policy outcomes