Industrial Policies in Production Networks (submitted)
(Job market paper version: Industrial Policies and Economic Development)
Abstract: Many developing countries adopt industrial policies that push resources towards selected economic sectors. How should countries choose which sectors to promote? I answer this question by characterizing optimal industrial policy in production networks embedded with market imperfections. My key finding is that effects of market imperfections accumulate through backward demand linkages, thereby generating aggregate sales distortions that are largest in the most upstream sectors. The distortion in sectoral sales is a sufficient statistic for the ratio between social and private marginal product of sectoral inputs; therefore, there is an incentive for a well-meaning government to subsidize upstream sectors. My sufficient statistic predicts the sectors targeted by government interventions in South Korea in the 1970s and in modern-day China.
Keeping The Little Guy Down: A Debt Trap For Informal Lending (with Ben Roth, submitted)
Abstract: Microcredit and other forms of small-scale ﬁnance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the division of surplus but also contractual ﬂexibility. We show these lending relationships may lead to endogenous poverty traps for poor borrowers if future income is not pledgeable, yet richer borrowers unambiguously beneﬁt. Improving the bargaining position of rich borrowers can harm poor borrowers, as the lender tightens restrictions and prevents them from growing. The theory rationalizes the low average impact and low demand of microﬁnance despite its high impact on larger businesses.
Growing Pains in Financial Development: Institutional Weakness and Investment Efficiency (with Daniel Green, submitted)
Abstract: There is little evidence that the expansion of microfinance has reduced poverty, but is instead increasingly associated with problematic multiple borrowing at high interest rates and high levels of debt and default. We develop a model that rationalizes these outcomes–if entrepreneurs cannot commit to exclusive borrowing from a single lender, expanding financial access by introducing multiple lenders may severely backfire. Capital allocation is distorted away from the most productive uses. Entrepreneurs choose inefficient and limited-growth endeavors. These problems are exacerbated when borrowers have access to more lenders, explaining why increased access to finance does not always improve outcomes.
Research in Progress
Manufacturing Underdevelopment (with John Firth)
Abstract: India's Freight Equalization Scheme (FES) aimed to promote even industrial development by subsidizing long-distance transport of key inputs such as iron and steel. Many observers speculate that FES actually exacerbated inequality by allowing rich manufacturing centers on the coast to cheaply source raw materials from poor central regions. Using the lifting of FES in early 1990s as a natural experiment and exploiting the state-by-industry variation in exposure to FES, we find empirical support to the conjecture. Specifically, industries that depend heavily on these materials, directly or indirectly, tend to experience faster growth upon the lifting of FES in the poor central regions, which have more abundant supply of the raw materials.