Insurance,credit, and technology adoption: Field experimental evidencefrom Malawi

Does production risk suppress the demand for credit? We implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and groundnut seeds for planting in the November 2006 crop season. The other half of farmers were offered a similar credit package, but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall. Surprisingly, take-up was lower by 13 percentage points among farmers offered insurance with the loan. Take-up was 33.0% for farmers who were offered the uninsured loan. There is suggestive evidence that reduced take-up of the insured loan was due to farmers already having implicit insurance from the limited liability clause in the loan contract: insured loan take-up was positively correlated with farmer education, income, and wealth, which may proxy for the individual's default costs. By contrast, take-up of the uninsured loan was uncorrelated with these farmer characteristics.     

Horizontal innovation-based growth and product market competition

The influence of the intensity of competition in the product market on economic growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1 − Lerner index) and depends on both the share of factor inputs in total income and the degree of substitutability across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We explain our results in terms of the interplay between the resource allocation and the profit incentive effects.     

Financial constraints and investment: assessing the impact of a World Bank credit program on small and medium enterprises in Sri Lanka

Abstract.  This paper examines the investment behaviour of a sample of small, credit-constrained firms in Sri Lanka. Using a unique panel data set, we analyze and compare the activities of two groups of small firms distinguished by their differential access to financing; one group consists of firms with subsidized loans from the World Bank, while the other group consists of firms without such subsidies. The paper shows that the program led to higher levels of investment for financially constrained firms. However, the evidence is inconclusive on whether the program improved economic efficiency.     

Designing credit agent incentives to prevent mission drift in pro-poor microfinance institutions

Credit agents in microfinance institutions (MFIs) must be given incentives to acquire information on potential borrowers and select them in accordance with the MFI's objectives. We show that while giving incentives has no cost in for-profit MFIs, it is costly in pro-poor MFIs: When repayment and wealth are positively correlated, a pro-poor MFI cannot obtain the selection of poor clients in the proportion it wishes with incentives based solely on repayment. It then becomes necessary to audit the share of very poor borrowers selected by an agent in order to provide the latter with adequate incentives. When audit costs are large, pro-poor MFIs may have to forego selection on wealth — and use other targeting devices such as working in impoverished geographical locations. Driven by donor concerns with ‘mission drift’ away from the poor, audits on the wealth status of clients have been introduced at the level of MFIs. We show that introducing pro-poor incentives requires extending such audits to the level of credit agents.     

Mergers and the market for organization capital

In this paper, mergers are an equilibrium outcome in which acquirers “marry” targets so as to gain access to their organization capital. Firms with lower learning costs about the new technology are not necessarily those that manage it best once it is mature. Since there are gains from trade, a market for organization capital can arise through mergers. This model generates a merger wave after a shock to technology and is consistent with several other stylized facts on mergers documented in the literature.     

Financial markets, the pattern of industrial specialization and comparative advantage: Evidence from OECD countries

Due to underlying technological and organizational differences, industries differ in their need for external finance. Since services provided by the financial sector are largely immobile across countries, the pattern of industrial specialization should be influenced by the level of financial development. Among OECD countries we find a strong causal effect of the financial sector on industrial specialization. Further, the financial sector is a source of comparative advantage in a way consistent with the Hecksher-Ohlin-Vanek model. Results are also presented on which aspects of financial systems are important for specialization and comparative advantage.     

Asymmetric effects of financial development on South-South and South-North trade: Panel data evidence from emerging markets

Using bilateral trade data in total and technology-and-skill-intensive manufactured goods for 28 developing countries that account for 82% of all developing country manufactures exports between 1978 and 2005, this paper explores the effects of financial development on the pattern of specialization in South-South and South-North trade. The empirical results using dynamic panel regressions and comprehensive sensitivity tests suggest that financial development in the South has an economically and statistically significant positive effect on the share of total and technology-and-skill-intensive manufactures exports in GDP, and total exports in South-South trade. In contrast, no such significant or robust effect of financial development is found in South-North trade. Overall, the positive effect of financial development is found to be asymmetric favoring South-South significantly more than South-North trade. In addition, financial development is found to be increasing technology-and-skill-intensive manufactured goods exports significantly more than total manufactured or merchandise goods exports.     

Bargaining power and enforcement in credit markets

In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of “bargaining power” between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all “bad” states in which loans are taken. In the latter case, in contrast, the borrower's consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way.     

The impact of information signals on market prices when agents have non-linear trading rules

Several methods have been developed for filtering seasonal influences and extreme returns in financial and economic time series. The theoretical support for these approaches is rather questionable since it focuses on the effects of shocks on prices and not on their sources. Removing such effects modifies the true generating system of market dynamics because of the non-proportional character of non-linearity. Thus, taking into account that the underlying process of economic time series is highly non-linear we cannot be certain a priori what the impact of new information will be on the dynamic structure of a system. The main contribution of this paper is to demonstrate using the methodology of simulations the eventual distortions in time series data arising from the arrival of news when agents follow non-linear trading strategies. We argue that if news can really modify the dynamical behaviour of a system, then the methodology of filtering exogenous distortions needs to be re-examined.     

Psychological determinants of occurrence and magnitude of market crashes

We simulate the Dynamic Stochastic General Equilibrium model of Mehra-Prescott [14] to establish the link between the anticipation of endowment drops (for instance a recession) and sudden market crashes. Contrary to the commonly accepted view that those crashes are solely driven by large drops in endowments at the time they occur, the simulation shows that: 1—a large and subjective anticipation of an endowment drop amplifies the magnitude of the crash next period without permanent effects, and 2—there always exists an upper-bound on the maximal anticipation of the drop so that the crash magnitude next period remains constant regardless of the drop level. Those findings are independent of the risk aversion of agents, and of the formation process of the anticipation.     

Financial market participation and the developing country business cycle

I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function.     

Stock exchange mergers and weak form of market efficiency: The case of Euronext Lisbon

This exploratory paper is among the first to examine the impact of stock exchange mergers on informational market efficiency. We focus on the merger of Bolsa de Valores de Lisboa e Porto (Portuguese Stock Exchange) with Euronext in 2002 (that created Euronext Lisbon). To investigate this question we perform numerous statistical tests: serial correlation test (ACF test), runs test, unit root test (Kwiatkowski, Philips, Schmidt, & Shin, 1992), multiple variance ratio test (Chow & Denning, 1993) and ranks and signs test (Wright, 2000).The results indicate that the Portuguese Equity Market is inefficient in weak form during pre-merger period implying that investors possessed an opportunity to earn abnormal returns though small in magnitude. The results, sensitive to the methodology used, indicate a mixed evidence of improvement in market efficiency during the post-merger period. Although the findings are mixed, yet most tests show a tendency of improved efficiency.     

Product market competition,R&D composition and growth

We revisit the relation between product market competition and leading-edge growth in a model where horizontal and vertical innovations simultaneously occur. We show that competition exerts an important effect on the composition of aggregate R&D (vertical versus horizontal). In fact, when product market competition gets more intense, a larger fraction of R&D is engaged in improving the quality of products; this occurs at the expense of a lower rate of horizontal innovation. This effect, which is absent in the basic endogenous growth model with only vertical innovations, may overturn the inverse relation between product market competition and leading-edge growth found in prior theoretical models.     

The provision of long-term credit and firm growth in developing countries

Do small and young firms benefit from an increase in the provision of long-term loans? By combining firm-level data from 62 countries (over the period 2006–2016) with a new database on short-term and long-term credit provided to the private sector, this article shows a higher provision of long-term credit does not stimulate growth of small and young firms. On the contrary, an increase in the availability of short-term credit spurs firm growth. The main explanation of this (counter-intuitive) result is the differential impact of short-term and long-term credit provision on small and young firms’ access to credit. Young and small firms are able to take advantage of an increase of short-term loans, which allow them to switch from informal finance to bank loans. However, a higher level of long-term credit does not alleviate credit constraints faced by opaque firms because these funds are allocated towards transparent borrowers.     

Estimates of gender differences in firm’s access to credit in Sub-Saharan Africa

Based on firm level data from 16 Sub-Saharan African countries we show how three different measures of credit constraints lead to three different estimates of gender differences in manufacturing firms’ credit situation. Using a perception based credit constraint measure female owned firms appear relatively more constrained than male owned firms. Using formal financial access data we find no gender effect. Finally, using direct information on credit constraints, male owned small firms appear disadvantaged. Furthermore we show a strong size gradient in the gender gap for the two measures for which we find significant gender differences.     

The effects of implicit contracts on wages: Evidence from the Japanese labor market

This paper tests whether wages in Japan’s labor market are determined by current or past labor market conditions. The empirical results are consistent with a model suggesting that labor market mobility may be limited and costly in Japan for men.     

Mortgage market credit conditions and U.S. Presidential elections

Voters punish incumbent Presidential candidates for contractions in the county-level supply of mortgage credit during market-wide contractions of credit, but do not reward them for expansions in mortgage credit supply in boom times. Our primary focus is the Presidential election of 2008, which followed an unprecedented swing from very generous mortgage underwriting standards to a severe contraction of mortgage credit. Voters responded to the credit crunch by shifting their support away from the Republican Presidential candidate in 2008. That shift was large and particularly pronounced in states that typically vote Republican, and in swing states. Without it McCain would have received half the votes needed in nine crucial swing states to reverse the outcome of the election. We extend our analysis to the Presidential elections from 1996 to 2012 and find that voters only react to contractions, not expansions, of credit, and reactions are similar for Democratic and Republican incumbent parties.     

Financial reform and the efficiency of credit allocation in Korea

This study analyzes some of the structural problems associated with the Korean financial sector, and investigates the efficiency of credit allocation by the financial system over the period from 1970 to 1996. Using data at the level of 32 industrial branches, we find no evidence that credit flows were directed sectors that were more profitable, either before or after financial reforms were initiated in the 1980s. We also find that the financial support did not contribute to improve the performance of the favored industries over time.     

Bank loans vs. trade credit

Using a World Bank dataset of Chinese firms, we investigate the relative importance of bank loans and trade credit in promoting firm performance. To deal with possible endogeneity issues, we employ distinct and separable instrumental variables for bank loans and trade credit. We find that access to bank loans is central to improving firm performance and growth, while the availability of trade credit is much less important. Our results suggest that trade credit cannot effectively substitute for bank loans. Overall, our findings suggest the need for further development of China's formal financial institutions, which would enable the non‐state sector to grow much faster than it has grown in recent decades.     

Endogenous market structures and the optimal financial structure

Abstract We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander‐Lewis‐Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number.