“Distinguishing barriers to insurance in Thai villages” (Job Market Paper)
A large body of evidence shows that informal insurance is an important risk-smoothing mechanism in developing countries, but that this risk sharing is incomplete. Models of limited commitment, moral hazard, and hidden income have been proposed to explain the incomplete nature of informal insurance, but the hidden income model has not previously been tested empirically. Using the first-order conditions characterizing optimal insurance subject to each type of constraint, I show that the way history matters in forecasting consumption can be used to distinguish hidden income from limited commitment and moral hazard. Under limited commitment and moral hazard, the inverse of a household’s marginal utility last period is a sufficient statistic for history in forecasting current inverse marginal utility, but under hidden income last period’s income has additional predictive power. This difference arises because under limited commitment and moral hazard, the community can control consumption by choosing transfers, and equates the cost of providing utility in the present and in the future. When income is unobserved, however, low-income households receive more utility in the present, when it is more valuable to truthful households, than in the future, when truthful and misreporting households value it equally. This implication does not rely on a particular specification of the production technology or utility function. In a seven-year panel from rural Thailand, I show that neither limited commitment nor moral hazard can fully explain the relationship between income and consumption. In contrast, the predictions of the hidden income model are supported by the data.
“The Miracle of Microfinance? Evidence from a Randomized Evaluation”
with Abhijit Banerjee, Esther Duflo and Rachel Glennerster
Microcredit has spread extremely rapidly since its beginnings in the late 1970s, but whether and how much it helps the poor is the subject of intense debate. This paper reports on the first randomized evaluation of the impact of introducing microcredit in a new market. Half of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not. We show that the intervention increased total MFI borrowing, and study the effects on the creation and the profitability of small businesses, investment, and consumption. Fifteen to 18 months after lending began in treated areas, there was no effect of access to microcredit on average monthly expenditure per capita, but expenditure on durable goods increased in treated areas and the number of new businesses increased by one third. The effects of microcredit access are heterogeneous: households with an existing business at the time of the program invest more in durable goods, while their nondurable consumption does not change. Households with high propensity to become new business owners increase their durable goods spending and see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners increase their nondurable spending. We find no impact on measures of health, education, or women's decision-making.
“Do Savings Crowd Out Informal Insurance? Evidence from a Lab Experiment in the Field”
with Arun Chandrasekhar and Horacio Larreguy
We use a laboratory experiment, conducted in 34 villages in Karnataka, India, to study the interaction between inability to commit to remain in an insurance agreement and ability to save income over time. This allows us to study the welfare consequences of access to savings when interpersonal insurance is constrained by limited commitment. These consequences are theoretically ambiguous: savings access allows smoothing of uninsured risk but also makes leaving the insurance agreement more palatable, which may affect consumption smoothing by reducing inter-household transfers. We also examine the effect of imposing a grim trigger post-defection strategy (permanent reversion to autarky).
We conduct games in which individuals face risky payoffs and can smooth this income risk by sharing with a randomly-assigned partner and, sometimes, by saving. In one treatment, we exogenously impose the grim trigger strategy. In the other treatment, we allow individuals to endogenously choose a response to defection by playing a sequential dictator game (SDG). When players are committed by the experimental design to use the grim trigger strategy, defection is rare and limited commitment does not appear to bind significantly. However, when players are free to choose a response to defection, defection rates are high and players punish each other significantly less than imposed by grim trigger. We use social network data to compute the social distance between pairs, and show that limited commitment constraints significantly limit insurance when risk-sharing partners are socially distant, but not when pairs are closely connected. For distant pairs, access to savings helps to smooth income risk that is not insured interpersonally.