Policy decisions often depend on evidence generated elsewhere. We take a decision theoretic approach to choosing where to experiment to optimize external validity. We frame external validity through a policy lens, taking a Bayesian approach and developing a prior specification for the joint distribution of site-level treatment effects using a microeconometric structural model and allowing for other sources of heterogeneity. With data from South Asia, we show that, relative to basing policies on experiments in optimal sites, large efficiency losses result from instead using evidence from randomly-selected sites or, conversely, from sites with the largest expected treatment effects.
Publications
Viewing publications by category: Papers
Poverty at Higher Frequency →
The poverty rate is an important focus of economic policy. We show, however, that in low- and middle-income countries, the poverty rate is often not what it seems. Poverty, as conventionally measured, is thought to be the proportion of households that are poor for the year, but we show that, under common data collection practices, the measure instead captures the average share of the year that households are poor. The resulting poverty rates are sensitive to the timing of household consumption, not just its total value. For policy, this means that, contrary to common assumptions, the de facto concept of national poverty in many countries is sensitive to households’ exposure to shocks and their ability to smooth consumption within the year. While created inadvertently, this de facto concept of poverty has appealing properties as a measure of well-being, and it raises new philosophical questions about the nature of deprivation. This transformation has happened without a change in the form of the poverty measures and without longitudinal data. Instead, the transformation follows from three common practices used when collecting household data: asking survey questions with short-term recall (often covering only the past week’s or month’s spending), stratifying on sub-periods (usually quarters), and surveying households only once during the year. We illustrate the implications with monthly panel data from rural India, showing that time-sensitivity in poverty measurement has quantitatively large impacts on measured poverty, improves predictions of health outcomes, and expands the scope of strategies to reduce global poverty.
What Win-Win Lost: Rethinking Microfinance Subsidy in the Past and Designing for the Future →
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
Lessons for Global Microfinance from . . . the United States? →
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
MFI Digitization in Central America’s Northern Triangle: The Impact of the Covid-19 Pandemic
Defying dire predictions from experts at the start of the pandemic, microfinance institutions in the Northern Triangle region of Central America showed great resilience through the challenges of the Covid-19 pandemic. Despite their relatively small scale, or perhaps because of it, the MFIs maintained stable profitability, and have proven to be very adaptable to digital change. This paper presents findings from a study to assess microfinance sector digitization, commissioned by the Financial Access Initiative at NYU-Wagner with funding from the Mastercard Center for Inclusive Growth.
Poverty at Higher Frequency
Poverty is typically measured as insufficient yearly income or consumption. In practice, however, poverty is marked by seasonality, economic instability, and illiquidity across months. To capture within-year variability, we extend traditional poverty measures to include a temporal dimension. Using panel data from rural India, we show how conventional poverty measures can distort understandings of poverty: exposure to poverty is wider and more common than typically measured, and poverty entry and exit are not sharp transitions. Accounting for within-year variability improves predictions of anthropometrics, and targeting transfers to challenging periods can reduce poverty most effectively by compensating for imperfect consumption smoothing.
A Dialogue on the Future of Microfinance and International Development
It will soon be the 50th anniversary and 200th issue of Mondes en développement (Developing Worlds), the French and Belgian journal founded in 1973 by François Perroux of the Collège de France. To mark the anniversary, we discuss what has been learned about microfinance, which, as a modern movement, is also roughly 50 years old. We discuss issues including the early history of microfinance and connections to shifting views on poverty and growth in international thought; the role of rhetoric within the microfinance sector; debates over subsidy; changing views of group lending; gender and finance; and whether everyone wants to be an entrepreneur.
Poverty and Migration in the Digital Age: Experimental Evidence on Mobile Banking in Bangladesh
Published in the American Economic Journal: Applied Economics, 2021.
Rapid urbanization is reshaping economies and intensifying spatial inequalities. In Bangladesh, we experimentally introduced mobile banking to very poor rural households and family members who had migrated to the city, testing whether mobile technology can reduce inequality by modernizing traditional ways to transfer money. One year later, for active mobile banking users, urban-to-rural remit- tances increased by 26 percent of the baseline mean. Rural con- sumption increased by 7.5 percent, and extreme poverty fell. Rural households borrowed less, saved more, sent additional migrants, and consumed more in the lean season. Urban migrants experienced less poverty and saved more but bore costs, reporting worse health.
Narrowing the Gender Gap in Mobile Banking
Mobile banking and related digital financial technologies can make financial services cheaper and more widely accessible in low-income economies, but gender gaps persist. We present evidence from two connected field experiments in Bangladesh designed to encourage the adoption and use of mobile banking by poor, illiterate households. We show that training can dramatically increase adoption and usage by women. At the same time, women on average persist in using mobile banking at a lower rate than men. The study focuses on migrants and their families in Bangladesh. Despite large differences between female and male migrants in income and education, the first experiment shows that a training program led to a similarly large, positive impact on mobile banking usage by female and male migrants, increasing usage rates for both by about 45 percentage points. That led to increases in remittances sent to rural areas, reduced rural poverty, and increased rural consumption. Both female and male migrants in the treatment group, however, reported worse physical and emotional health, adding to health challenges reported by women across treatment and control groups. A second experiment explores whether the way that the technology was introduced and explained made an additional difference in narrowing gender gaps. Despite the lack of statistical power to detect small treatment impacts, we find suggestive evidence that the treatment increased mobile banking adoption by female migrants.
Migration and the Diffusion of Covid-19 in South Asia
The initial spread of COVID-19 halted economic activity as countries around the world restricted the mobility of their citizens. As a result, many migrant workers returned home, spreading the virus across borders. We investigate the relationship between migrant movements and the spread of COVID-19 using district-day-level data from Bangladesh, India, and Pakistan (the 1st, 6th, and 7th largest sources of international migrant workers). We find that during the initial stage of the pandemic, a 1 SD increase in prior international out-migration relative to the district-wise average in India and Pakistan predicts a 48% increase in the number of cases per capita. In Bangladesh, however, the estimates are not statistically distinguishable from zero. Domestic out-migration predicts COVID-19 diffusion in India, but not in Bangladesh and Pakistan. In all three countries, the association of COVID-19 cases per capita and measures of international out-migration increases over time. The results show how migration data can be used to predict coronavirus hotspots. More broadly, the results are consistent with large cross-border negative externalities created by policies aimed at containing the spread of COVID-19 in migrant-receiving countries.
COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan
The initial spread of COVID-19 halted economic activity as countries around the world restricted the mobility of their citizens. As a result, many migrant workers returned home, spreading the virus across borders. We investigate the relationship between migrant movements and the spread of COVID-19 using district-day-level data from Bangladesh, India, and Pakistan (the 1st, 6th, and 7th largest sources of international migrant workers). We find that during the initial stage of the pandemic, a 1 SD increase in prior international out-migration relative to the district-wise average in India and Pakistan predicts a 48% increase in the number of cases per capita. In Bangladesh, however, the estimates are not statistically distinguishable from zero. Domestic out-migration predicts COVID-19 diffusion in India, but not in Bangladesh and Pakistan. In all three countries, the association of COVID-19 cases per capita and measures of international out-migration increases over time. The results show how migration data can be used to predict coronavirus hotspots. More broadly, the results are consistent with large cross-border negative externalities created by policies aimed at containing the spread of COVID-19 in migrant-receiving countries.
Paying in Pieces: A Natural Experiment on Demand for Life Insurance under Different Payment Schemes
Risk is pervasive in low-income economies, but insurance markets tend to be under-developed and demand for existing products is often low and poorly understood. Usually, customers must buy insurance by making a single lump-sum payment. We study a popular life insurance product sold by Mexico’s leading microfinance institution. We exploit a large-scale natural experiment involving 200,000 poor female microcredit customers and show that demand increased by 59 to 74 percent when customers were allowed to pay in weekly installments instead of in a lump sum, even though doing so was more costly for them. The finding is not explained by price or income, which do not change. We describe the possible roles of liquidity constraints and other explanations, and relate the result to discussions of demand for microinsurance and other products, including merit goods, in similar contexts.
Social Investment through the Lens of Microfinance
The reality of social investment can be messy. How could it not be? The aim is to support a new sort of capitalist endeavor driven by pursuit of social progress rather than just pursuit of profit. Yet modern history has been shaped by the tensions between unbridled capitalism and struggles for social and economic justice. Microfinance has been a laboratory for these developments, somehow embracing both market denialism and market fundamentalism, showing possibilities, limits, and conundrums. We reflect on four questions central to both “big ideas” and practical action: (1) How do user fees (including prices and interest rates) help and hurt customers and businesses? (2) How worrisome is mission drift, and why does it happen? (3) What is the role of subsidy? (4) How should social returns be measured?
By Jonathan Morduch and Tim Ogden
The Microfinance Business Model: Enduring Subsidy and Modest Profit
Recent evidence suggests only modest social and economic impacts of microfinance. Favorable cost-benefit ratios then depend on low costs. This paper calculates the costs of microcredit and other elements of the microcredit business model using proprietary data on 1,335 microfinance institutions between 2005 and 2009, jointly serving 80.1 million borrowers. The costs of making small loans to poorer clients are high, and when revenues fall short of costs, subsidies are necessary to deliver services to those clients on a sustainable basis. Using a method that accounts for the opportunity costs of all forms of subsidy, the analysis finds that the median institution receives five cents of subsidy per dollar lent and $51 of subsidy per borrower (in PPP adjusted terms). Relatively low levels of median subsidy suggest that even modest benefits of microcredit could yield impressive cost-benefit ratios. The distribution of subsidies is highly skewed, however: the average subsidy per dollar lent is 13 cents and the average subsidy per borrower is $248. The data show that subsidies per borrower are substantially higher for commercial microfinance banks and some non-bank financial institutions that make relatively large loans. MFIs organized as non-governmental organizations (NGOs), in contrast, generally rely less on subsidy.
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
In and Out of Poverty: Episodic Poverty and Income Volatility in the U.S. Financial Diaries
We use data from the U.S. Financial Diaries study to relate episodic poverty to intra-year income volatility and to the availability of government transfers. The U.S. Financial Diaries data track a continuous year’s worth of month-to-month income for 235 low- and moderate-income households, each with at least one employed member, in four regions in the United States. The data provide an unusually granular view of household financial transactions, allowing the documentation of episodic poverty, and the attribution of a large share of it to fluctuations in earnings within jobs. For households with annual income greater than 150 percent of the poverty line, smoothing within-job income variability reduces the incidence of episodic poverty by roughly half. We decompose how month-to-month income volatility responds to receipt of eight types of public or private transfers. The transfers assist households mainly by raising the mean of income rather than by dampening intra-year income variability.
By Jonathan Morduch and Julie Siwicki
Exploring the Business Models Behind Microsaving
The financial and business models for collecting savings by microfinance institutions have been relatively little explored in literature. This paper seeks to fill the gap by evaluating deposit-taking MFIs that rely on two primary types of savings: those that emphasize raising funding (through large deposit accounts) and those that emphasize service (through small deposit accounts). The findings suggest that geographic location, level of economic development, and regulatory environment all play an important role in dictating the types of models that are likely to be adopted. Different models also have substantially different funding and operating costs. Finally, net outreach levels in terms of number of savers served appear to be little affected by choice of model, though in many cases outreach may be skewed by widespread presence of empty accounts, which overstate the number of active depositors, and understate the average account balance.
By Daniel Rozas
Banks and Microbanks
We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.
Income Gains and Month-to-Month Income Volatility: Household evidence from the US Financial Diaries
The US Financial Diaries track the finances of a small sample of low and moderate-income households over a year. The households faced substantial swings in income from month to month. On average, they experienced 2.5 months when income fell more than 25 percent below average.
Substitution Bias & External Validity: Why an innovative anti-poverty program showed no net impact
The net impact of development interventions can depend on the availability of close substitutes to the intervention. We analyze a randomized trial of an innovative anti-poverty program in South India which provides “ultra-poor” households with inputs to create a new, sustainable livelihood. We find no statistically significant evidence of lasting net impact on consumption, income or asset accumulation. Instead, income from the new livelihood substituted for earnings from wage labor. A very similar intervention made a large difference elsewhere in South Asia, however, where wage labor alternatives were less compelling. The analysis highlights the roles of substitution bias and dropout bias in shaping evaluation results and delimiting external validity.
Impact of Microcredit on the Poor in Bangladesh
We replicate and reanalyse the most influential study of microcredit impacts (Pitt and Khandker, 1998). That study was celebrated for showing that microcredit reduces poverty, a much hoped-for possibility (though one not confirmed by recent randomized controlled trials). We show that the original results on poverty reduction disappear after dropping outliers, or when using a robust linear estimator. Using a new program for estimation of mixed process maximum likelihood models, we show how assumptions critical for the original analysis, such as error normality, are contradicted by the data. We conclude that questions about impact cannot be answered in these data.
Price and Information in Life Microinsurance Demand: Experimental Evidence from Mexico
Poor households in developing countries face large and varied risks, but often have inadequate informal tools to manage them. Microinsurance is being developed to create a better alternative, and it should--in theory--be in high demand. Yet take-up of microinsurance remains low. I study the impact of price and information on the demand for life microinsurance among microfinance borrowers of Compartamos in Mexico. I randomly assigned 8,700 borrowers to two of four treatments: (i) no longer receive a base amount of subsidized insurance coverage (high price) or keep the subsidy (low price), and (ii) being informed with a message emphasizing the financial toll of a funeral and how the insurance payoff helps to face it (financial information) or information emphasizing the emotional toll of a funeral on the surviving family (emotional information). On average, eliminating the subsidy led to a decrease in insurance coverage, but the two messages did not impact coverage. The impacts are heterogeneous, however. . .
Latest Findings from Randomized Evaluations of Microfinance
In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector .
Do Interest Rates Matter? Credit Demand in the Dhaka Slums
"Best practice" in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level.
Microfinance and Social Investment
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
Behavioral Foundations of Microcredit: Experimental and Survey Evidence From Rural India
We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline on borrowers. We find that, conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Another particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.
Can Insurers Improve Healthcare Quality? Evidence from a Community Microinsurance Scheme in India
We investigate whether microinsurers can help improve the quality of healthcare, and not just its price. We study Indian patients who had a caesarean section, appendectomy, hysterectomy, or abdominal hernia surgery. We compare indicators of facility’s infrastructure; doctor’s qualification and knowledge; process of care; and patient satisfaction. Two thirds of insured patients contacted the insurer about their choice of provider. They are directed towards facilities that are part of the insurer’s network, which have better infrastructure than non-network facilities. Being insured, however, is not significantly associated with receiving better-quality care, even when controlling for several patient and facility characteristics.
Borrowing to Save: Perspectives from Portfolios of the Poor
It’s not surprising that saving is hard for many of us. We’re impatient, temptations are at hand, and savings devices are seldom ideal. By the same token, it would not be surprising to find that we have a hard time keeping money in the bank. But, puzzlingly, new studies give examples of people withdrawing funds less often than neoclassical economic theory suggests they should (e.g., relative to the simulations of optimal savings in Deaton 1991). And, paradoxically, it is often the same people who had trouble saving who also have trouble drawing down their savings. Some are so reluctant to dis-save that they willingly borrow at expensive interest rates to avoid touching their savings.
Microfinance Games
Microfinance banks use group-based lending contracts to strengthen borrowers’ incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack microfinance mechanisms through ten experimental games played in an experi- mental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts benefit borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, espe- cially the most risk averse.
Microfinance Tradeoffs: Regulation, Competition, and Financing
We describe important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, we find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices – and thus embracing and weighing tradeoffs carefully.
Microfinance Meets the Market
Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit- maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.
From Microfinance to m-Finance
In some countries it can take years to get a new telephone line installed. In 1990, there were just 10 telephone lines installed for every 1000 people in the Philippines. In Kenya, the ratio was 7 per thousand. In India, 6 per thousand. Compare that with the United Kingdom with 441 lines per thousand in 1990, or the United States with 545. For decades, public sector telephone companies in developing economies seldom had incentives or budgets to rapidly expand land line networks, and the private sector has had even less motivation to serve the costly-to-reach.
The Unbanked: Evidence from Indonesia
Why do so many poor households lack access to finance? Are the unbanked creditworthy? Largely not interested in borrowing? The answers are at the heart of ongoing debates around the deepening of financial systems We examine household-level data from 1438 households in six provinces in Indonesia. All households, whether or not they were presently borrowing, were assessed by bank professionals to judge creditworthiness. About 40 percent of poor households were judged creditworthy, but only 14 percent had recently borrowed. Possessing collateral was a minor determinant of creditworthiness. Despite depictions of widespread pent-up demand for loans, about half of creditworthy poor households report being averse to taking on debt. Loans for small business were desired, but respondents often highlight broader household needs, including paying for school fees, medical treatment, and home repair.
Income Smoothing and Consumption Smoothing
Two observations are essential to understanding the market structure of most low-income economies. First, many markets do not exist and, of those that do, many work imperfectly. Second and more optimistically, a wealth of behavioral and institutional responses often emerge to fill in the holes left by market failures. . .