Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis

Emily Breza, Cynthia Kinnan

NBER Working Paper No. 24329
Issued in February 2018, Revised in January 2021
NBER Program(s):Corporate Finance, Development Economics, Labor Studies, Productivity, Innovation, and Entrepreneurship

In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nation-wide shock to the liquidity of lenders, especially those with loans in the affected state. We use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium in rural labor markets. Using a proprietary district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, we find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings and consumption. We find a substantial consumption multiplier from credit that is likely driven by two channels – aggregate demand and business investment. We calibrate a simple two-period, two-sector model of the rural economy that incorporates both channels and show that the magnitude of our wage results is consistent with the model’s predictions.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w24329