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The Real Cost of Credit Constraints: Evidence from Micro-finance

Author

Listed:
  • Sane Renuka

    (Indian Statistical Institute, 7 SJSS Marg, Katwaria Sarai, New Delhi 110016, India)

  • Thomas Susan

    (Indira Gandhi Institute of Development Research, Santosh Nagar, Goregaon (East), Mumbai 400065, India)

Abstract

The paper studies the effect of a law that banned micro-credit lending in the state of Andhra Pradesh in India. Regions in Andhra Pradesh are matched to regions that did not face the ban. A difference-in-difference estimation of changes in matched regions is used to establish a causal impact on average household consumption in the region. The results show that the average household consumption in the ban-affected regions dropped by 15% immediately after the ban compared to the matched regions, and persisted for four quarters. The result is robust to cross-sectional variations in regional exposure to micro-finance prior to the ban, variation in rural and urban locations and variations in matching strategy. The analysis points to a ban as a sub-optimal intervention to improve customer welfare.

Suggested Citation

  • Sane Renuka & Thomas Susan, 2016. "The Real Cost of Credit Constraints: Evidence from Micro-finance," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(1), pages 151-183, January.
    • Handle: RePEc:bpj:bejeap:v:16:y:2016:i:1:p:151-183:n:5
    DOI: 10.1515/bejeap-2014-0154
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    Cited by:

    1. Ajay Shah, 2023. "The journey of Indian finance," Working Papers 25, xKDR.
    2. Saxena, Vibhor & Bindal, Ishaan & LeMay-Boucher, Philippe, 2020. "Social groups and credit shocks: Evidence of inequalities in consumption smoothing," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 311-326.
    3. Vibhor Saxena & Ishaan Bindal & Philippe LeMay-Boucher, 2019. "Social groups and credit shocks: Evidence of inequalities in consumption smoothing," Discussion Paper Series, School of Economics and Finance 201901, School of Economics and Finance, University of St Andrews.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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