The Real Cost of Credit Constraints: Evidence from Micro-finance

Article Type

Research Article

Publication Title

B.E. Journal of Economic Analysis and Policy

Abstract

The paper studies the effect of a law that banned micro-credit lending in the state of Andhra Pradesh in India. Regions in Andhra Pradesh are matched to regions that did not face the ban. A difference-in-difference estimation of changes in matched regions is used to establish a causal impact on average household consumption in the region. The results show that the average household consumption in the ban-affected regions dropped by 15% immediately after the ban compared to the matched regions, and persisted for four quarters. The result is robust to cross-sectional variations in regional exposure to micro-finance prior to the ban, variation in rural and urban locations and variations in matching strategy. The analysis points to a ban as a sub-optimal intervention to improve customer welfare.

First Page

151

Last Page

183

DOI

10.1515/bejeap-2014-0154

Publication Date

1-1-2016

Comments

Open Access; Bronze Open Access

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