1932

Abstract

An all-or-nothing view of financial access leading to overly simplistic policy recommendations has been largely overturned in the data. Heterogeneity and explicit obstacles to trade are key aspects that need to be incorporated into models when looking at intermediate outcomes in the data. Networks in particular can amplify or work against policy interventions and do so in different directions for different groups at the same time. Work on village money markets allows us to better understand how these networks function, and how and why they can change with policy interventions. Nevertheless, though village economies are as sophisticated as those in New York financial markets, both suffer from familiar problems. One is reliance on relationships that segment markets and limit more universal benefits. A second problem is market contagion. Policy interventions facilitating financial access and the functioning of markets need to be guided by this stricter yet more realistic view.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-012820-034126
2022-11-01
2024-04-25
Loading full text...

Full text loading...

/deliver/fulltext/financial/14/1/annurev-financial-012820-034126.html?itemId=/content/journals/10.1146/annurev-financial-012820-034126&mimeType=html&fmt=ahah

Literature Cited

  1. Alliance Financ. Incl 2010 G20 leaders emphasize financial inclusion as driver for social and economic growth . Press Release; June 28. https://www.afi-global.org/newsroom/news/g20-leaders-emphasize-financial-inclusion-as-driver-for-social-and-economic-growth/
    [Google Scholar]
  2. Angrist JD. . 2014; The perils of peer effects. Labour Econ . 30 98 108
    [Google Scholar]
  3. Aronoff D , Townsend RM , Zhang N. . 2021 Coordination problems, leverage constraints and a smart contract implementation for the repo market . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  4. Attanasio O , Davis SJ. . 1996; Relative wage movements and the distribution of consumption. J. Political Econ. 104 6 1227 62
    [Google Scholar]
  5. Banerjee A , Breza E , Chandrasekhar AG , Duflo E , Jackson MO , Kinnan C. . 2021 Changes in social network structure in response to exposure to formal credit markets NBER Work. Pap. 28365
    [Google Scholar]
  6. Banerjee A , Breza E , Townsend RM , Vera-Cossio D. . 2019 Access to credit and productivity: evidence from Thai villages . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  7. Banerjee AV , Duflo E. . 2014; Do firms want to borrow more? Testing credit constraints using a directed lending program. Rev. Econ. Stud. 81 2 572 607
    [Google Scholar]
  8. Bell C , Srinivasan TN , Udry C. . 1997; Rationing, spillover, and interlinking in credit markets: the case of rural Punjab. Oxf. Econ. Pap. 49 4 557 85
    [Google Scholar]
  9. Binzel C , Field E , Pande R. . 2013 Does the arrival of formal financial institutions alter informal sharing arrangements? Experimental evidence from village India . Work. Pap. Duke Univ.; Durham, NC:
    [Google Scholar]
  10. Boissay F , Gropp R. . 2013; Payment defaults and interfirm liquidity provision. Rev. Finance 17 6 1853 94
    [Google Scholar]
  11. Bonhomme S , Chiappori P-A , Townsend RM , Yamada H. . 2012 Sharing wage risk . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  12. Chandrasekhar AG , Kinnan C , Larreguy H. . 2018; Social networks as contract enforcement: evidence from a lab experiment in the field. Am. Econ. J. Appl. Econ. 10 4 43 78
    [Google Scholar]
  13. Chandrasekhar AG , Townsend RM , Xandri JP. . 2021 Liquidity, financial centrality and the value of key players . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  14. Chiappori P-A , Samphantharak K , Schulhofer-Wohl S , Townsend RM. . 2014; Heterogeneity and risk sharing in village economies. Quant. Econ. 5 1 1 27
    [Google Scholar]
  15. Cocco JF , Gomes FJ , Martins NC. . 2009; Lending relationships in the interbank market. J. Financ. Intermed. 18 1 24 48
    [Google Scholar]
  16. Conning J. . 2001 Mixing and matching loans: an empirical analysis of credit rationing and spillovers in a rural credit market in Chile . Work. Pap. 164 Proj. IRIS, Univ. Md.; Baltimore:
    [Google Scholar]
  17. Conning J. . 2005. ‘Ventas piratas’: product market competition and the depth of lending relationships in a rural market in Chile . Work. Pap. City Univ. N.Y., New York;
    [Google Scholar]
  18. Deaton A. . 1990 On risk, insurance, and intra-village consumption smoothing . Work. Pap. Princeton Univ.; Princeton, NJ:
    [Google Scholar]
  19. Diamond P. . 1967; The role of a stock market in a general equilibrium model with technological uncertainty. Am. Econ. Rev. 57 4 759 76
    [Google Scholar]
  20. G20 Pres. Indones 2022; Recover together recover stronger. G20.org . https://g20.org/g20-presidency-of-indonesia/#recover
    [Google Scholar]
  21. Gine X. . 2011; Access to capital in rural Thailand: an estimated model of formal versus informal credit. J. Dev. Econ. 96 1 16 29
    [Google Scholar]
  22. Heß S , Jaimovich D , Schündeln M . 2021; Development projects and economic networks: lessons from rural Gambia. Rev. Econ. Stud. 88 3 1347 84
    [Google Scholar]
  23. Hoff K , Stiglitz JE. . 1990; Introduction: imperfect information and rural credit markets: puzzles and policy perspectives. World Bank Econ. Rev. 4 3 235 50
    [Google Scholar]
  24. Jacobson T , von Schedvin E. . 2015; Trade credit and the propagation of corporate failure: an empirical analysis. Econometrica 83 4 1315 71
    [Google Scholar]
  25. Jain S. . 1999; Symbiosis versus crowding-out: the interaction of formal and informal credit markets in developing countries. J. Dev. Econ. 59 2 419 44
    [Google Scholar]
  26. Jorion P , Zhang G. . 2009; Credit contagion from counterparty risk. J. Finance 64 5 2053 87
    [Google Scholar]
  27. Kaboski JP , Townsend RM. . 2011; A structural evaluation of a large-scale quasi-experimental microfinance initiative. Econometrica 79 5 1357 406
    [Google Scholar]
  28. Kaboski JP , Townsend RM. . 2012; The impact of credit on village economies. Am. Econ. J. Appl. Econ. 4 2 98 133
    [Google Scholar]
  29. Karaivanov A , Kessler A. . 2018; (Dis)advantages of informal loans – theory and evidence. Eur. Econ. Rev. 102 100 28
    [Google Scholar]
  30. Karaivanov A , Townsend RM. . 2014; Dynamic financial constraints: distinguishing mechanism design from exogenously incomplete regimes. Econometrica 82 3 887 959
    [Google Scholar]
  31. Kinnan C , Samphantharak K , Townsend RM , Vera-Cossio D. . 2021 Propagation and insurance in village networks . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  32. Kinnan C , Townsend R. . 2012; Kinship and financial networks, formal financial access, and risk reduction. Am. Econ. Rev. 102 3 289 93
    [Google Scholar]
  33. Ligon E , Thomas JP , Worrall T. . 2002; Informal insurance arrangements with limited commitment: theory and evidence from village economies. Rev. Econ. Stud. 69 1 209 44
    [Google Scholar]
  34. Petersen MA , Rajan RG. . 1997; Trade credit: theories and evidence. Rev. Financ. Stud. 10 3 661 91
    [Google Scholar]
  35. Pozsar Z. . 2014 Shadow banking: the money view . Work. Pap. 14-04 Off. Financ. Res., US Dep. Treas; . Washington, DC:
    [Google Scholar]
  36. Ravallion M , Chaudhuri S. . 1997; Risk and insurance in village India: comment. Econometrica 65 1 171 84
    [Google Scholar]
  37. Ru H , Townsend RM. . 2022 Kinship networks enhanced by a formal financial intervention: costly state verification and the Thai village fund . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  38. Samphantharak K , Townsend RM. . 2018; Risk and return in village economies. Am. Econ. J. Microecon. 10 1 1 40
    [Google Scholar]
  39. Schulhofer-Wohl S. . 2011; Heterogeneity and tests of risk sharing. J. Political Econ. 119 5 925 58
    [Google Scholar]
  40. Silva DH , Townsend RM. . 2021 Risk-taking over the life cycle: aggregate and distributive implications of entrepreneurial risk . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  41. Sripakdeevong P , Townsend RM. . 2019 The village money market revealed: credit chains and shadow banking . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  42. Suri T. . 2013 Estimating the extent of risk sharing between households . Work. Pap. MIT; Cambridge, MA:
    [Google Scholar]
  43. Townsend RM. . 1978; Intermediation with costly bilateral exchange. Rev. Econ. Stud. 45 3 417 25
    [Google Scholar]
  44. Townsend RM. . 1979; Optimal contracts and competitive markets with costly state verification. J. Econ. Theory 21 2 265 93
    [Google Scholar]
  45. Townsend RM. . 1994; Risk and insurance in village India. Econometrica 62 3 539 91
    [Google Scholar]
  46. Townsend RM , Yaron J. . 2001; The credit risk-contingency system of an Asian development bank. Econ. Perspect. 25 3 31 48
    [Google Scholar]
  47. Vera-Cossio D. . 2022; Targeting credit through community members. J. Eur. Econ. Assoc. 20 2 778 821
    [Google Scholar]
  48. Vuong QH. . 1989; Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica 57 2 307 33
    [Google Scholar]
  49. Wade R. . 1988 Village Republics: Economic Conditions for Collective Action in South India Cambridge, UK: Cambridge Univ. Press;
    [Google Scholar]
  50. Wilson R. . 1968; The theory of syndicates. Econometrica 36 1 119 32
    [Google Scholar]
/content/journals/10.1146/annurev-financial-012820-034126
Loading
/content/journals/10.1146/annurev-financial-012820-034126
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error