Working Papers:

Knowing what’s good for you: Can a repayment flexibility option in microfinance contracts improve repayment rates and business outcomes? JOB MARKET PAPER [PDF]

with Parul Agarwal (IFMR-LEAD)

IGC Blog Post  IGC Project Webpage  AEA RCT Registry

Abstract: Repayment flexibility in microfinance contracts can enable clients to undertake higher return projects that have more irregular payment streams. But there is the risk of increased default due to time-inconsistent or excessively risky borrower behavior. How severe is this default risk and can it be mitigated simply by using contract price as a screening mechanism? To examine this we implement a randomized experiment with microfinance borrowers in Uttar Pradesh, India. In treated branches, borrowers select between the standard, rigid contract and a more expensive flexible contract. In control branches, customers are only offered the standard rigid contract. Clients in treated branches have higher repayment rates than control branches. We also find higher business sales in treatment compared to control group. Selection is an important mechanism – in treated branches, time-consistent and more financially disciplined borrowers are significantly more likely to opt for the flexible repayment schedule.

Risk aversion and signalling in single and multiple-bank lending, Submitted [PDF]

with Sandro Casal (University of Trento) and Tania Treibich (Maastricht University)

Abstract:  This paper studies the conditions under which banks and firms choose to engage in single versus multiple bank lending relationships. We design a theoretical model where borrowers use single lending relationships as a way to signal their commitment to repay hence their better quality, despite the riskiness of their investment opportunity. The model predicts that lenders should react more positively to single lending requests for riskier projects than for safer ones, irrespectively of their risk aversion. We test these hypotheses in an experimental credit market in which we exogenously vary the riskiness of borrowers' investment opportunity and borrowers' ability to choose between single and multiple bank lending relationships -- thus making such commitment signal more or less salient. We find that, when given a choice, borrowers tend to disproportionately choose multiple over single lending relationships. However, this tendency is slightly reversed when their investment opportunity is risky -- although point estimates are noisy. We also find that lenders are significantly less likely to lend when borrowers can choose between single and multiple lenders -- and choose multiple -- than when the number of lenders is exogenously given, even after controlling for project riskiness and risk aversion.

However, when the project is risky and borrowers are given the opportunity to choose, lenders are less reluctant to deny credit. Our results suggest that the commitment signal embedded in loan requests heavily influences lending

decisions, and might compensate for both project riskiness and lenders' risk aversion.

The Anatomy of Cultural Proximity in Lending, with Antonio Accetturo (Bank of Italy), Michele Cascarano (Bank of Italy), Emilia Garcia-Appendini (University of Zurich) and Francesca Modena (Bank of Italy)

In this paper, we study the role of cultural proximity in credit market outcomes. We first construct a comprehensive dataset that traces all bank-firm relationships for the population of firms and banks that operate in South Tyrol – a region located in the North of Italy where two main linguistic groups (Italian and German) coexist. For each firm and bank, we use a textual algorithm to classify the predominant cultural group of the administrators. We find that firms are more likely to demand credit from culturally-close banks; the first link that firms establish with the banking system is generally within the same cultural group. We also find that cultural proximity has an impact on the

market equilibria. Access to credit is relatively easier when firms and banks share the same cultural

origin; firms that obtain credit from culturally-close banks also receive larger loan quantities.

Finally, we find that loans granted to the same group tend to be less collateralized and generally have a better performance in terms of credit quality.

Can Foreign Banks act as Shock Absorbers? Evidence from the Great Recession. Submitted [PDF]

National Bank of Belgium Working Paper version

Abstract: This paper shows that foreign banks can act as a buffer against negative credit supply shocks, in countries where the domestic banking sector is “too big to be rescued” by the national government. Using Belgian Credit Register data, I find that after 2008, foreign banks lent more than Belgian domestic banks, even when implementing the Khwaja and Mian (2008)’s loan-level estimator to absorb demand shocks. At the extensive margin, foreign banks were more selective than domestic banks in starting new relationships, and turned down existing relationships less frequently with higher-quality firms. Results from this paper suggest that foreign banks helped better-performing firms access credit during the temporary difficulty of the domestic banking sector. In addition, my findings are compatible with a “moral suasion” story, where the Belgian regulators pressured domestic banks to lend to certain firms, despite these were less performing.


Does your neighbour know you better? The supportive role of local banks in the financial crisis

with Carlotta Rossi (Bank of Italy)

Journal of Banking and Finance (2019), n. 206, pp. 514-526.

Repayment Flexibility in Microfinance Contracts: Theory and Experimental Evidence on Take-Up and Selection

Journal of Economic Behavior & Organization (2017), n. 142, pp. 425-450.

Financial Inclusion in a Developed Country: an Experiment about Formal Savings in Italy

with Alessandra Cassar (USF) and Timothée Demont (University of Marseille)

Journal of Behavioral Economics for Policy (2017), n. 1, pp. 39-49.

AEA RCT Registry

Adverse Selection and Moral Hazard in Joint-Liability Loan Contracts: Evidence from an Artefactual Field Experiment

with Alessandra Cassar (USF), Arturo Rodriguez Trejo (USF) and Bruce Wydick (USF)

Journal of Economics and Management (2013), n. 9, pp. 153-184.

University of Chicago Special Issue on Field Experiments in Economics and Management, Guest Editors: John List, Micheal Price, Anya Samek

Signalling through Joint-Liability: an Adverse Selection Model

Rivista Italiana degli Economisti (2013), n. 18, pp. 299-318.

Special Issue on Social Cohesion and Financial Exclusion, Guest Editors: Leonardo Becchetti, Arnold W. Boot, Robert Lensink, Alberto Zazzaro

Selected Work-in-Progress:

Evaluating the economic impacts of rural banking: Evidence from Southern India, with Erica Field (Duke University) and Rohini Pande (Harvard University), manuscript preparation.

How do firms grow? Understanding knowledge sharing in small firms, with Elisa Giannone (Penn State University)

The role of repeated trainings for the correct usage of household green products: A field experiment in rural India, with Anca Balietti (Harvard University), Rohini Pande (Harvard University), Dan Sweeney (MIT) and Parul Agarwal (IFMR-LEAD), baseline ongoing

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