Essays in informal finance and market design under weak institutions
Author(s)Roth, Benjamin N. (Benjamin Nathaniel)
Massachusetts Institute of Technology. Department of Economics.
Abhijit Banerjee and Daron Acemoglu.
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1. Keeping the Little Guy Down: A Debt Trap for Informal Lending -- 2. Targeting High Ability Entrepreneurs Using Community Information: Mechanism Design In The Field -- 3. Voluntary Market Design: Dominant Individual Rationality.The essays in this thesis span two important and related themes in development economics: understanding and relaxing constraints to small scale entrepreneurship and designing markets in environments with weak institutional enforcement. Methodologically, the essays marshal both theory and field experimentation to study these issues. In joint work with Ernest Liu, Chapter 1 offers a new explanation for why microcredit and other forms of informal finance have so far failed to catalyze business growth among small scale entrepreneurs in the developing world, despite their high return to capital. We present a theory of informal lending that highlights two features of informal credit markets that cause them to operate inefficiently. First, borrowers and lenders bargain not only over division of surplus but also over contractual flexibility (the ease with which the borrower can invest to grow her business). Second, when the borrower's business becomes sufficiently large she exits the informal lending relationship and enters the formal sector - an undesirable event for her informal lender. We show that in Stationary Markov Perfect Equilibrium these two features lead to a poverty trap and study its properties. The theory facilitates reinterpretation of a number of empirical facts about microcredit: business growth resulting from microfinance is low on average but high for businesses that are already relatively large, and microlenders have experienced low demand for credit. The theory features nuanced comparative statics which provide a testable prediction and for which we establish novel empirical support. Using the Townsend Thai data and plausibly exogenous variation to the level of competition Thai money lenders face, we show that as predicted by our theory, money lenders in high competition environments impose fewer contractual restrictions on their borrowers. We discuss robustness and policy implications. In work with Reshmaan Hussam and Natalia Rigol, Chapter 2 explores a different facet of small-scale entrepreneurship. The impacts of cash grants and access to credit are known to vary widely, but progress on targeting these services to high-ability, reliable entrepreneurs is so far limited. We report on a field experiment in Maharashtra, India that assesses (1) whether community members have information about one another that can be used to identify high-ability microentrepreneurs, (2) whether organic incentives for community members to misreport their information obscure its value, and (3) whether simple techniques from mechanism design can be used to realign incentives for truthful reporting. We asked 1,380 respondents to rank their entrepreneur peers on various metrics of business profitability and growth potential. We also randomly distributed cash grants of about $100 to measure their marginal return to capital. We find that the information provided by community members is predictive of many key business and household characteristics including marginal return to capital. While on average the marginal return to capital is modest, preliminary estimates suggest that entrepreneurs given a community rank one standard deviation above the mean enjoy an 8.8% monthly marginal return to capital and those ranked two standard deviations above the mean enjoy a 13.9% monthly return. When respondents are told their reports influence the distribution of grants, we find a considerable degree of misreporting in favor of family members and close friends, which substantially diminishes the value of reports. Finally, we find that monetary incentives for accuracy, eliciting reports in public, and cross-reporting techniques motivated by implementation theory all significantly improve the accuracy of reports. In Chapter 3 I highlight an under appreciated facet of centralized market design of critical importance to developing economies with weak contract enforcement: often market designers cannot force participants to join a centralized market. I present a theory in which centralizing a market is akin to designing a mechanism to which people may voluntarily sign away their decision rights and propose a new desideratum for mechanism and market design, termed e-dominant individual rationality. Loosely, E-dominant individual rationality guarantees participation by assuring participants that each decentralized strategy is approximately dominated by a centralized strategy. I then provide two positive results about centralizing large markets. The first offers a novel justification for stable matching mechanisms and an insight to guide their design to achieve E-dominant individual rationality. The second result demonstrates that in large games, any mechanism with the property that every player wants to use it conditional on sufficiently many others using it as well can be modified to satisfy E-dominant individual rationality while preserving its behavior conditional on sufficient participation. The modification relies on a class of mechanisms we refer to as random threshold mechanisms and resembles insights from the differential privacy literature.
Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2017.Cataloged from PDF version of thesis.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Department of Economics
Massachusetts Institute of Technology