An evaluation of financial institutions: Impact on consumption and investment using panel data and the theory of risk-bearing
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Author(s)
Alem, Mauro
Townsend, Robert M.
Townsend, Robert
Date Issued
June 2014
Journal
Journal of Econometrics
Publisher
Elsevier
Citation
Alem, Mauro, and Townsend, Robert M. “An Evaluation of Financial Institutions: Impact on Consumption and Investment Using Panel Data and the Theory of Risk-Bearing.” Journal of Econometrics 183, 1 (November 2014): 91–103 © 2014 Elsevier
Version
Author's final manuscript
Abstract
The theory of the optimal allocation of risk and the Townsend Thai panel data on financial transactions are used to assess the impact of the major formal and informal financial institutions of an emerging market economy. We link financial institution assessment to the actual impact on clients, rather than ratios and non-performing loans. We derive both consumption and investment equations from a common core theory with both risk and productive activities. The empirical specification follows closely from this theory and allows both OLS and IV estimation. We thus quantify the consumption and investment smoothing impact of financial institutions on households including those running farms and small businesses. A government development bank (BAAC) is shown to be particularly helpful in smoothing consumption and investment, in no small part through credit, consistent with its own operating system, which embeds an implicit insurance operation. Commercial banks are smoothing investment, largely through formal savings accounts. Other institutions seem ineffective by these metrics.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/J.JECONOM.2014.06.011
