Abstract: Private enterprise development in low-income countries remains elusive, and the failure of microcredit to stimulate small firm growth poses a puzzle to the finance and development literature. Using artefactual field experiments in two countries, I show that equity-like contracts stimulate more profitable investments, and I find a novel and nuanced role for risk preferences: loss-averse individuals prefer equity, but the substantial portion of individuals who exhibit non-linear probability weighting prefer debt. Using structural estimation and simulations, I demonstrate that equity-like contractual innovations that incorporate these insights – and are increasingly feasible due to fintech developments – can unlock small firm investment.
Discussant: Gautam Rao, University of California-Berkeley
Mohit Desai, University of North Carolina-Chapel Hill
Pulak Ghosh, Indian Insitute of Management-Bangalore
Nishant Vats, Washington University in St. Louis
Abstract: Can high-speed internet boost information access and enhance productivity? Combining granular geographic data on the introduction of 4G with remote-sensing data on agricultural productivity, we show that the improvement in information dissemination due to the introduction of 4G leads to an increase in productivity, fertilizer consumption, and credit uptake. Our identification strategy exploiting the staggered state-level introduction of Rights of Way (RoW) policies meant to promote the growth of telecom infrastructure echoes similar results. Overall, we find that six years after the introduction of 4G internet, the annual income of agricultural households grew by 14.5%. Using detailed farmer-level internet-browsing data, we show that the introduction of 4G is related to internet adoption and acquiring agri-related information. Exploiting spatial heterogeneity in the value, reliability and accuracy of information we argue that 4G improves productivity by improving access to information. We document that the decentralized nature of internet-based information access dominates traditional call or text-based information access by circumventing frictions associated with trust in the state. While our results indicate that high-speed internet is an important tool for information dissemination, merely introducing internet infrastructure may not be sufficient. Information that is disseminated must be reliable and valuable, making internet access a complement to information generation.
Discussant: Raissa Fabregas, University of Texas-Austin
Emil Verner, Massachusetts Institute of Technology
Paul Dai, Massachusetts Institute of Technology
Karsten Müller, National University of Singapore
Abstract: This paper studies the interaction between the sectoral allocation of credit and long-run
economic development. We document a new set of Financial Kuznets Facts: as countries get
richer, the share of manufacturing credit falls relative to value added, while the opposite is
true for credit to the real estate sector. To jointly explain this structural transformation in credit
markets and the real economy, we build a two-sector model with heterogeneous collateral
constraints in which real estate output supports collateralized borrowing. In a quantitative
calibration of our model, differences in sectoral productivity explain most of the structural
change in the real economy, while the collateral constraints account more for structural change
in credit markets. We provide empirical evidence supporting the relevance of these mecha-
nisms and show that the share of manufacturing in outstanding credit is positively correlated
with long-run growth. To understand the potential role of government interventions, we show
that liberalizations of directed credit policies that channel credit to “priority sectors” are asso-
ciated with a redistribution of credit from manufacturing to real estate. Taken together, our
analysis suggests that financial frictions may play a role in structural transformation and long-
run economic growth by influencing the allocation of credit.
Discussant: Kristina Manysheva, Columbia University
Abstract: We study production responses to emission capping regulation on manufacturing firms. We find that firms reduced their pollution as they transitioned from self-generated to externally sourced electricity, shifted toward producing less coal-intensive products, and increased their abatement expenditures. Firms preserved profitability by increasing their production of higher-margin products. However, firms in highly polluting industries produced fewer products. In the aggregate, we document lower product variety, higher markups, an altered firm-size distribution, and lower business formation. Our findings highlight both the mechanisms behind how mandated pollution reduction can be effective and its costs, suggesting a loss in agglomeration externalities.
