WINDFALL OR DOWNFALL: TIME INCONSISTENT BEHAVIOUR IN THE ABSENCE OF MICROFINANCE

Principal Investigators: Abhijit Banerjee (MIT), Esther Duflo (MIT), Emily Breza (Columbia University), Cynthia Kinnan (Northwestern University), Prathap Kasina (J-PAL)
Research Team: Parul Agarwal & Sneha Stephen
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Savings
Project Geography: Hyderabad, Andhra Pradesh, India
Partner: Spandana Sphoorty Financial Limited
Status: Ongoing

Background:

The study proposes to measure the impacts of the withdrawal of microfinance from urban neighbourhoods in the wake of the 2010-2011microfinance crisis in Andhra Pradesh, India. In particular, the researchers attempt to understand if households with greater present bias were less well-equipped to manage the windfall gain from the crisis’s implicit loan forgiveness policy. Since microfinance has many characteristics of a commitment savings device, the absence of such a device could be welfare decreasing for time inconsistent households. Results from our study could help to inform the current microfinance debate by highlighting behavioural benefits from the industry.

The study empirical strategy combines both the natural experiment that occurred in AP and a previously completed randomized experiment. Since the emergency ordinance was unexpected and affected all borrowers in AP in a similar way, researchers will treat the timing of the crisis as virtually random. The study will use the data and treatment and control populations from the microfinance impact evaluation of Banerjee et al. (2009). In their study, they introduced new microloans to urban neighbourhoods in Hyderabad, the capital of Andhra Pradesh in a randomized fashion in 2006-2007. All of the individuals from that study have been affected by the microfinance crisis.

Related Resources
WORKING PAPER: Assessing the Effect of Andhra Pradesh Microfinance Crisis on the Access to Finance of the MFI Clients
POLICY MEMO: Impact Evaluation of a Micro-Credit Expansion in Urban India