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1. Self-Selection into Credit Markets: Evidence from Agriculture in Mali

Author:
Dean Karlan, Bram Thuysbaert, Christopher Udry, and Lori Beaman
Publication Date:
09-2014
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
We partnered with a micro-lender in Mali to randomize credit offers at the village level. Then, in no-loan control villages, we gave cash grants to randomly selected households. These grants led to higher agricultural investments and profits, thus showing that liquidity constraints bind with respect to agricultural investment. In loan-villages, we gave grants to a random subset of farmers who (endogenously) did not borrow. These farmers have lower – in fact zero – marginal returns to the grants. Thus we find important heterogeneity in returns to investment and strong evidence that farmers with higher marginal returns to investment self-select into lending programs.
Topic:
Agriculture and Economics
Political Geography:
Africa

2. Savings by and for the Poor: A Research Review and Agenda

Author:
Dean Karlan, Jonathan Zinman, and Aishwarya Lakshmi Ratan
Publication Date:
11-2013
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
The poor can and do save, but often use formal or informal instruments that have high risk, high cost, and limited functionality. This could lead to undersaving compared to a world without market or behavioral frictions. Undersaving can have important welfare consequences: variable consumption, low resilience to shocks, and foregone profitable investments.
Topic:
Development, Economics, Globalization, International Trade and Finance, Markets, Poverty, and Financial Crisis

3. Hoping to Win, Expected to Lose: Theory and Lessons on Microenterprise Development

Author:
Dean Karlan, Ryan Knight, and Christopher Udry
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
We show how financial and managerial constraints impede experimentation and thus limit learning about the profitability of investments. Imperfect information about one's own type, but willingness to experiment to learn one's type, leads to short-run negative expected returns to investments, with some outliers succeeding. We find in an experiment that entrepreneurs invest randomized grants of cash and adopt advice from randomized grants of consulting services, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. In a meta-analysis, results from 19 other experiments find mixed support for this theory.
Topic:
Development, Economics, Markets, Foreign Aid, and Foreign Direct Investment
Political Geography:
Africa

4. Agricultural Decisions after Relaxing Credit and Risk Constraints

Author:
Dean Karlan, Robert Osei, Christopher Udry, and Isaac Osei-Akoto
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
The investment decisions of small-scale farmers in developing countries are conditioned by the farmers' financial environment. Binding credit-market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall-index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing in a farmer's own receipt of insurance payouts, and with the receipt of payouts by others in the farmer's social network. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, and with imperfect trust that promised payouts will be delivered.
Topic:
Agriculture, Economics, Markets, Food, and Foreign Direct Investment

5. Group Versus Individual Liability: A Field Experiment in the Philippines

Author:
Xavier Giné and Dean Karlan
Publication Date:
01-2007
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group liability claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other's loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender's overall profitability and the poor's access to financial markets. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability “centers” of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that converting to individual liability from group liability but keeping other aspects of group lending such as weekly repayment meeting does not affect the repayment rate, but leads to higher outreach by attracting new clients.
Topic:
Economics, Markets, and Poverty
Political Geography:
Philippines and Southeast Asia

6. Credit Elasticities in Less-Developed Economies: Implications for Microcredit

Author:
Dean Karlan and Jonathan Zinman
Publication Date:
01-2007
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Policymakers often prescribe that microfinance institutions increase interest rates to eliminate reliance on subsidies. This strategy makes sense if the poor are rate insensitive: then microlenders increase profitability (or achieve sustainability) without reducing the poor's access to credit. We test the assumption of price inelastic demand using randomized trials conducted by a consumer lender in South Africa. The demand curves are downward-sloping, and steep for price increases relative to the lender's standard rates. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rates, which is consistent with binding liquidity constraints.
Topic:
Development, Economics, and Markets
Political Geography:
Africa and South Africa

7. Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions

Author:
Dean Karlan and Martin Valdivia
Publication Date:
01-2007
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Can one teach basic entrepreneurship skills, or are they fixed personal characteristics? Most academic and development policy discussions about microentrepreneurs focus on their access to credit, and assume their human capital to be fixed. The self-employed poor rarely have any formal training in business skills. However, a growing number of microfinance organizations are attempting to build the human capital of micro-entrepreneurs in order to improve the livelihood of their clients and help further their mission of poverty alleviation. Using a randomized control trial, we measure the marginal impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments. We find that the treatment led to improved business knowledge, practices and revenues. The program also improved repayment and client retention rates for the microfinance institution. Larger effects found for those that expressed less interest in training in a baseline survey. This has important implications for implementing similar market-based interventions with a goal of recovering costs.
Topic:
Development, Economics, Education, and Gender Issues

8. Female Empowerment: Impact of a Commitment Savings Product in the Philippines

Author:
Dean Karlan, Wesley Yin, and Nava Ashraf
Publication Date:
01-2007
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Female “empowerment” has increasingly become a policy goal, both as an end to itself and as a means to achieving other development goals. Microfinance in particular has often been argued, but not without controversy, to be a tool for empowering women. Here, using a randomized controlled trial, we examine whether access to an individually-held commitment savings product leads to an increase in female decision-making power within the household. We find positive impacts, particularly for women who have below median decision-making power in the baseline, and we find this leads to a shift towards female-oriented durables goods purchased in the household.
Topic:
Development, Economics, and Gender Issues
Political Geography:
Southeast Asia