Informal Finance: A Theory of Moneylenders

I study the coexistence of formal and informal finance in underdeveloped credit markets. While weak institutions constrain formal banks, shallow pockets hamper informal lenders. In such economies, informal finance has two effects. By increasing the investment return it decreases borrowers’ relative payoff following default, inducing banks to lend more liberally (disciplinary effect). By channeling bank capital it reduces banks’ agency costs from lending directly to borrowers, limiting banks’ extension of borrower credit (rent-extraction effect). Among other things, the model shows that informal interest rates are higher, borrower welfare lower, and informal finance more prevalent when the rent-extraction effect prevails, consistent with stylized facts in poor societies.Credit Markets, Financial Development, Institutions, Market Structure

State Repression, Exit, and Voice

What is the political legacy of state repression? Using local variation in state repression during the Khmer Rouge genocide in Cambodia, we investigate the effects of repression on political beliefs and behavior. We find that past state repression decreases votes for an authoritarian incumbent while enhancing electoral competition and support for democratic values four decades later. At the same time, individuals become more cautious in their interactions with the local community: they exhibit less trust, participate less in community organizations, and engage less with local government. Our theoretical model suggests that these opposing forces arise because experiencing repression bolsters preferences for pluralism while also heightening the perceived cost of dissent. Consequently, citizens are more likely to support the opposition in elections (voice) but engage less in civil society (exit) to avoid publicly revealing their political views. Exploring channels of persistence, we demonstrate that repression cultivates a lasting fear of violence as a societal threat, and that genocide memorials and remembrance ceremonies maintain the collective memory of the atrocities

Shaping the Nation: The Effect of Fourth of July on Political Preferences and Behavior in the United States

This paper examines whether social interactions and cultural practices affect political views and behavior in society. We investigate the issue by documenting a major social and cultural event at different stages in life: the Fourth of July celebrations in the United States during the 20th century. Using absence of rainfall as a proxy for participation in the event, we find that days without rain on Fourth of July in childhood shift adult views and voting in favor of the Republicans and increase turnout in presidential elections. The effects we estimate are highly persistent throughout life and originate in early age. Rain-free Fourth of Julys experienced as an adult also make it more likely that people identify as Republicans, but the effect depreciates substantially after a few years. Taken together, the evidence suggests that political views and behavior derive from social and cultural experience in early childhood, and that Fourth of July shapes the political landscape in the Unites States

Repayment Flexibility and Risk Taking: Experimental Evidence from Credit Contracts

A widely held view is that small firms in developing countries are prevented from making profitable investments by lack of access to credit and insurance markets. One solution is to provide repayment flexibility in credit contracts. Repayment flexibility eases both the credit constraint, as it allows for increased spending during the startup phase, and offers insurance, in case of fluctuations in income. In a field experiment among traditional microfinance clients and larger collateralized borrowers in Bangladesh, we randomly assign the option to delay up to 2 monthly repayments at any point during a 12-month loan cycle. The flexible contract leads to substantial improvements in the traditional microfinance clients’ business outcomes, driven by borrowers in the upper tail of the distribution. In addition, we find a significant impact on socioeconomic status, combined with lower default rates. We show theoretically and empirically that these effects are induced by an increase in entrepreneurial risk taking, implying that the primary mechanism is insurance provision. Repayment flexibility also attracts less risk-averse borrowers interested in business expansion. At the same time, the effects for the larger loan are much more modest. Our findings suggest that lack of insurance is an important constraint for small firms but that a simple financial product that increases repayment flexibility can be an effective tool for enabling enterprise growth

Do political protests matter? Evidence from the Tea Party movement

Can protests cause political change, or are they merely symptoms of underlying shifts in policy preferences? We address this question by studying the Tea Party movement in the United States, which rose to prominence through coordinated rallies across the country on Tax Day, April 15, 2009. We exploit variation in rainfall on the day of these rallies as an exogenous source of variation in attendance. We show that good weather at this initial, coordinating event had significant consequences for the subsequent local strength of the movement, increased public support for Tea Party positions, and led to more Republican votes in the 2010 midterm elections. Policy making was also affected, as incumbents responded to large protests in their district by voting more conservatively in Congress. Our estimates suggest significant multiplier effects: an additional protester increased the number of Republican votes by a factor well above 1. Together our results show that protests can build political movements that ultimately affect policy making and that they do so by influencing political views rather than solely through the revelation of existing political preferences

Clash of Civilizations: Impact of Culture on Militarized Interstate Dispute

Abstract Huntington (1993a, 1993b, 1998, 2000) argued that the fundamental source of con ‡ict in the post-Cold War world will not be primarily ideological or primarily economic, but the great divisions among humankind and the dominating source of con ‡ict will be cultural and religious; as such, the primary axis of con‡ict in the future will be along civilizational lines. To that end, in addition to confronting several of Huntington's hypotheses we scrutinize the impact of culture on militarized interstate disputes and test whether countries that belong to di¤erent civilizations tend to be more involved in con ‡ict than countries that belong to the same civilization. We show that over the period of 1816-2001 civilizational dissimilarity in a dyad increases the probability of con ‡ict calculated at the means of the variables by up to 62.8 percentage points. More strikingly, even after controlling for geographic, political, military and economic factors, being part of di¤erent civilizations in the post-Cold War period brings about 71.2 percentage points higher con ‡ict probability than belonging to the same civilization while it reduces the probability of con ‡ict by 25.7 percentage points during the Cold War. JEL Classi…cation: D74, N40, N70, Z10

The Social Cost of a Credit Monopoly

Banks provide credit and take deposits. Whereas a high price in the credit market increases banks’ retained earnings and attracts more deposits, it reduces lending if borrowers are sufficiently poor to be tempted by diversion. Thus optimal bank market structure trades off the benefits of monopoly banking in attracting deposits against losses due to tighter credit. The model shows that market structure is irrelevant if both banks and borrowers lack resources. Monopoly banking induces tighter credit rationing if borrowers are poor and banks are wealthy, and increases lending if borrowers are wealthy and banks lack resources. The results indicate that improved legal protection of creditors is a more efficient policy choice than legal protection of depositors, and that subsidies to firms lead to better outcomes than subsidies to banks. There are also likely to be sizable gains from promoting bank competition in developing countries.

Informal Finance: A Theory of Moneylenders

I study the coexistence of formal and informal finance in underdeveloped credit markets. While weak institutions constrain formal banks, shallow pockets hamper informal lenders. In such economies, informal finance has two effects. By increasing the investment return it decreases borrowers’ relative payoff following default, inducing banks to lend more liberally (disciplinary effect). By channeling bank capital it reduces banks’ agency costs from lending directly to borrowers, limiting banks’ extension of borrower credit (rent-extraction effect). Among other things, the model shows that informal interest rates are higher, borrower welfare lower, and informal finance more prevalent when the rent-extraction effect prevails, consistent with stylized facts in poor societies