Social Sciences - Essays in Finance and Development Economics

Abstract

This dissertation consists of three essays at the intersection of finance and development economics. The first essay uses a framed field experiment in the Indian market for small-enterprise loans to explore the effect of organizational structure on bank lending. I show that the organizational structure of a banks lending model has important implications for the collection, transmission and use of borrower information. This affects risk-assessment and constrains the profitability of the banks lending. However, I show that simple incentive contracts, using performance pay to align interests at the different tiers of the banks corporate hierarchy, are effective in attenuating moral hazard, facilitating communication and improving the profitability of lending. The second essay, co-authored with Professor Shawn Cole, Harvard Business School and Leora Klapper, The World Bank, explores the impact of performance incentives on risk-assessment and lending. We analyze the underwriting process of small-business loans in an emerging market, comparing four commonly implemented incentive schemes. The results show strong and economically significant effects of performance pay on risk-assessment and lending decisions. High-powered incentives cause credit officers to exert greater screening effort, while making significantly more conservative lending decisions. We also find that deferring performance pay weakens the ability of high-powered incentives to induce effort. Finally, we document considerable heterogeneity in the behavioral response to performance incentives: experienced loan officers are significantly less responsive to incentives that reward lending volume over performance. The third essay explores the effect of debt relief on the financial position and economic decisions of beneficiary households, using a survey of 2,897 households affected by the Indian Debt Relief Program for Small and Marginal Farmers, one of the largest debt relief programs in history. Results show that debt relief does not improve investment or productivity, but leads to a strong and persistent shift in the composition of borrowing. I further document strong effects of debt relief on beliefs about the seniority of debt and the reputational consequences of default. These findings are consistent with the literature on personal bankruptcy and suggest that bailout programs are of limited use in addressing problems of debt-overhang, but have significant behavioral implications.

Source: http://www.socscience.com/business-administration/17972.html

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