Credit Lines as Insurance: Evidence from Bangladesh

Job Market Paper

Abstract: In the absence of insurance markets, theory suggests that households can use credit to protect themselves against adverse income shocks. However, in many developing countries access to credit in the aftermath of shocks is scarce as negatively affected households are frequently denied loans. In this paper, I test whether a new financial product that offers guaranteed credit access after a shock allows households to insure themselves against risk. To this end, I run a large scale RCT involving 300,000 subjects in Bangladesh with one of the country’s largest microcredit institutions. Microfinance clients were randomly pre-approved for loans that are made available in the event of local flooding. I show that this unique type of microcredit improves household welfare through two channels: an ex-ante insurance effect where households increase investment in risky production and an ex-post effect where households are better able to maintain consumption and asset levels after a shock. I also document that households value this product, taking costly action to preserve their guaranteed access. Importantly, extension of this additional credit improves loan repayment rates and MFI profitability, suggesting that this product can be sustainably extended to households already connected to microcredit networks.

The Impact of Monitoring Technologies on Contracts and Employee Behavior: Experimental Evidence from Kenya’s Matatu Industry

(with Erin Kelley and David Schönholzer)

Abstract: Agency theory suggests that moral hazard in employer–employee contracting constrains firm profits. We use a randomized controlled trial to empirically evaluate how information and communication technologies (ICT) can mitigate moral hazard and enable firms to design more efficient contracts which increase profits and engender business growth. Specifically, we study a fleet of 255 minibuses (matatus) in Nairobi, Kenya, where we introduce monitoring devices that track real-time vehicle location, daily productivity, and safety statistics. We randomize whether minibus owners have access to these monitoring data through a novel mobile app. The information we provide to owners in the treatment group allows them to observe a more precise signal of driver effort, the amount of revenue collected in fares, and the extent to which the driver engages in damaging driving. We find that this information treatment allows vehicle owners to modify the terms of the contract by decreasing the rental price they demand. Drivers respond by exerting more effort, decreasing behavior that damages the vehicle, and under-reporting revenue by less, leading to an overall increase in firm profitability and facilitating investments in additional buses. Finally we investigate whether these gains to the company come at the expense of passenger safety, which is already at risk in an industry with frequent accidents. While we do not find any evidence that conditions deteriorate, offering detailed information on driving behavior also does not improve safety. Only by incentivizing drivers through an additional cash treatment do we detect safety improvements.

Works in Progress