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The real cost of credit constraints: Evidence from micro-finance

Author

Listed:
  • Renuka Sane

    () (Indira Gandhi Institute of Development Research)

  • Susan Thomas

    () (Indira Gandhi Institute of Development Research)

Abstract

In December 2010, the Indian state of Andhra Pradesh passed a law that severely restricted the operations of micro-finance institutions and brought the micro-finance industry to an abrupt halt. We measure the impact of micro-credit withdrawal in this unique natural experiment and find that average household expenditure dropped by 19 percent relative to a control group after the ban. The largest decrease was observed in expenditure on food. There is some evidence of higher volatility in consumption after the ban. All households were affected and not just the borrower households, which may suggest general equilibrium effects.

Suggested Citation

  • Renuka Sane & Susan Thomas, 2013. "The real cost of credit constraints: Evidence from micro-finance," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-013, Indira Gandhi Institute of Development Research, Mumbai, India.
  • Handle: RePEc:ind:igiwpp:2013-013
    as

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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2013-013.pdf
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    References listed on IDEAS

    as
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    6. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports 309, Federal Reserve Bank of New York.
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    9. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106.
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    More about this item

    Keywords

    Consumption smoothing; credit; household finance; micro-finance ban; natural experiment;

    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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