Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis

By Emily Breza, Cynthia Kinnan. Quarterly Journal of Economics, 2018

135 citations recorded by the source corpus.

In October 2010, the state government of Andhra Pradesh, India, issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nationwide shock to the liquidity of lenders, especially those with loans in the affected state. We use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium in rural labor markets. Using a proprietary district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, we find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings, and consumption. We find a substantial consumption multiplier from credit that is likely driven by two channels—aggregate demand and business investment. We calibrate a simple two-period, two-sector model of the rural economy that incorporates both channels and show that the magnitude of our wage results is consistent with the model’s predictions.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c117833a34af4070bc92bb443b4786add7d87110

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Citations in the corpus

Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs? (2019, background): “First, only 20% of these households start 3The findings on wages and employment are consistent with the general equilibrium predictions laid out theoretically by Buera et al. (2017) and tested empirically in the context of India by Breza and Kinnan (2018).”
Changes in Social Network Structure in Response to Exposure to Formal Credit Markets (2021, unknown): “We have anecdotal reasons to believe that the choice was not systematic: BSS planned to enter all of the villages but slowed down and ultimately stopped expanding during the Andhra Pradesh (AP) microcredit crisis (see Breza and Kinnan, 2021 for background on that crisis).”