Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts

Expanding credit access is a key ingredient of development strategies worldwide. Microfinance practitioners, policymakers, and donors have ambitious goals for expanding access, and seek efficient methods for implementing and evaluating expansion. There is less consensus on the role of consumer credit in expansion initiatives. Some microfinance institutions are moving beyond entrepreneurial credit and offering consumer loans. But many practitioners and policymakers are skeptical about “unproductive” lending. These concerns are fueled by academic work highlighting behavioral biases that may induce consumers to over borrow. We estimate the impacts of a consumer credit supply expansion using a field experiment and follow-up data collection. A South African lender relaxed its risk assessment criteria by encouraging its loan officers to approve randomly selected marginal rejected applications. We estimate the resulting impacts using new survey data on applicant households and administrative data on loan repayment, as well as public credit reports one and two years later. We find that the marginal loans produced significant benefits for borrowers across a wide range economic and well-being outcomes. We also find some evidence that the marginal loans were profitable for the Lender. The results suggest that consumer credit expansions can be welfare-improving.Microfinance, credit impact, consumer credit

Identifying Information Asymmetries: New Methods and Evidence from a Randomized Field Experiment

This paper estimates the prevalence of asymmetric information in a consumer credit market using a field experiment of our design. A major South African lender issued 60,000 direct mail offers where the interest rate was randomized along two different dimensions — an initial “offer rate†on the direct mail solicitation, and a weakly lesser “contract rate†the applicant received after responding to the solicitation and agreeing to the initial offer rate. These two dimensions of random variation in interest rates, combined with the large sample (including 6,200 accepted offers) and complete knowledge of the Lender’s information set, will enable us to identify the prevalence and impacts of specific types of private information. Specifically, our setup distinguishes adverse selection from moral hazard/repayment burden effects on repayment and profitability, and thereby generates unique empirical evidence on the sources and importance (or lack thereof) of asymmetric information.adverse selection, moral hazard, field experiment

Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila

Microcredit seeks to promote business growth and improve well-being by expanding access to credit. We use a field experiment and follow-up survey to measure impacts of a credit expansion for microentrepreneurs in Manila. The effects are diffuse, heterogeneous, and surprising. Although there is some evidence that profits increase, the mechanism seems to be that businesses shrink by shedding unproductive workers. Overall, borrowing households substitute away from labor (in both family and outside businesses), and into education. We also find substitution away from formal insurance, along with increases in access to informal risk-sharing mechanisms. Our treatment effects are stronger for groups that are not typically targeted by microlenders: male and higher-income entrepreneurs. In all, our results suggest that microcredit works broadly through risk management and investment at the household level, rather than directly through the targeted businesses.microfinance, microcredit, microentreprenuership, risk sharing, formal and informal finance

Elasticities of Demand for Consumer Credit

The price elasticity of demand for credit has major implications for macroeconomics, finance, and development. We present estimates of this parameter derived from a randomized trial. The experiment was implemented by a consumer microfinance lender in South Africa and identifies demand curves that, while downward-sloping with respect to price, are flatter than recent estimates in both developing and developed countries throughout most of a wide price range. However, demand becomes highly price sensitive at higher-than-normal rates. We discuss several interpretations of this kink and present some related evidence. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rate. This pattern is more pronounced among lower income individuals, a comparative static that has been observed in the United States as well and is consistent with liquidity constraints that decrease with income.Credit Markets, Microfinance, Demand Elasticity, Development Finance, Maturity Elasticity, Consumer Credit

Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment

Information asymmetries are important in theory but difficult to identify in practice. We estimate the empirical importance of adverse selection and moral hazard in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers issued by a major South African lender along three dimensions: 1) the initial "offer interest rate" appearing on direct mail solicitations; 2) a "contract interest rate" equal to or less than the offer interest rate and revealed to the over 4,000 borrowers who agreed to the initial offer rate; and 3) a dynamic repayment incentive that extends preferential pricing on future loans to borrowers who remain in good standing. These three randomizations, combined with complete knowledge of the Lender's information set, permit identification of specific types of private information problems. Specifically, our setup distinguishes adverse selection from moral hazard effects on repayment, and thereby generates unique evidence on the existence and magnitudes of specific credit market failures. We find evidence of both adverse selection (among women) and moral hazard (predominantly among men), and the findings suggest that about 20% of default is due to asymmetric information problems. This helps explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers at very high rates.Information asymmetries, field experiment, adverse selection, moral hazard, development finance, credit markets, microfinance

Put your money where your butt is : a commitment contract for smoking cessation

The authors designed and tested a voluntary commitment product to help smokers quit smoking. The product (CARES) offered smokers a savings account in which they deposit funds for six months, after which they take a urine test for nicotine and cotinine. If they pass, their money is returned; otherwise, their money is forfeited to charity. Eleven percent of smokers offered CARES tookup, and smokers randomly offered CARES were 3 percentage points more likely to pass the 6-month test than the control group. More importantly, this effect persisted in surprise tests at 12 months, indicating that CARES produced lasting smoking cessation.Tobacco Use and Control,Health Monitoring&Evaluation,Disease Control&Prevention,Alcohol and Substance Abuse,Adolescent Health

Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment

Empirical evidence on peer intermediation lags behind many years of lending practice and a large body of theory in which lenders use peers to mitigate adverse selection and moral hazard. Using a simple referral incentive mechanism under individual liability, we develop and implement a two-stage field experiment that permits separate identification of peer screening and enforcement effects. We allow for borrower heterogeneity in both ex-ante repayment type and ex-post susceptibility to social pressure. Our key contribution is how we deal with the interaction between these two sources of asymmetric information. Our method allows us to cleanly identify selection on the likelihood of repayment, selection on the susceptibility to social pressure, and loan enforcement. We estimate peer effects on loan repayment in our setting, and find no evidence of screening (albeit with an imprecisely estimated zero) and large effects on enforcement. We then discuss the potential utility and portability of the methodological innovation, for both science and for practice.

Behind the GATE Experiment: Evidence on Effects of and Rationales for Subsidized Entrepreneurship Training

Various theories of market failures and targeting motivate the promotion of entrepreneurship training programs throughout the world. Using data from the largest randomized control trial ever conducted on entrepreneurship training, we examine the validity of such motivations and find that training does not have strong effects (in either relative or absolute terms) on those most likely to face credit or human capital constraints, or labor market discrimination. On the other hand, training does have a relatively strong short-run effect on business ownership for those unemployed at baseline, but not at other horizons or for other outcomes. On average, training increases short-run business ownership and employment, but there is no evidence of broader or longer-run effects on business ownership, business performance or broader outcomes.