Working Paper: NBER ID: w24329
Authors: Emily Breza; Cynthia Kinnan
Abstract: 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 nation-wide 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.
Keywords: Microfinance; Credit Supply; Consumption; Labor Markets; India
JEL Codes: D50; G21; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit supply shock (E51) | Decrease in casual daily wages (J31) |
| Credit supply shock (E51) | Decrease in household wage earnings (J31) |
| Credit supply shock (E51) | Decrease in consumption (E21) |
| Decrease in credit supply (E51) | Decrease in consumption (E21) |
| Decrease in credit supply (E51) | Decrease in firm liquidity (G33) |
| Decrease in firm liquidity (G33) | Decrease in hiring (J63) |
| Credit supply shock (E51) | Aggregate demand decrease (E41) |
| Aggregate demand decrease (E41) | Decrease in consumption (E21) |
| Credit supply shock (E51) | Decrease in non-agricultural sector outcomes (F69) |