Essays on development finance

This thesis consists of three essays that examine investment choices in less developed countries. Chapter 1 examines how the structure of existing microfinance contracts may discourage risky but high-expected return investments. I develop a theory that unifies models of investment choice, informal insurance, and formal financial contracts and test the predictions using a series of experiments with Indian microfinance clients. The experiments confirm that borrowers free-ride on their partners, making risky investments without compensating partners for this risk, and that the addition of peer-monitoring overcompensates, leading to sharp reductions in risk-taking and profitability. However, the theoretical prediction that group lending will crowd out informal insurance is not borne out by experimental evidence. While observed levels of informal insurance fall well short of the constrained Pareto frontier under both individual and joint liability, joint liability increases observed insurance transfers. Equity-like financing overcomes both of these inefficiencies and merits further testing in the field. Chapter 2 investigates the relationship between inflation uncertainty and the investment decisions of small, microfinance-funded firms in the Dominican Republic. Using loanlevel panel data from microfinance borrowers in the Dominican Republic, I find that periods of increased inflation uncertainty were associated with substantially lower investments in fixed assets and reduced business growth. This finding is robust to specifications controlling for other forms of systemic risk and aggregate economic activity, suggesting inflation uncertainty creates potentially large distortions to the investment decisions of poor entrepreneurs.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2008

Author dc:creator

• Fischer, Gregory M. (Gregory Mark)

Advisor dc:contributor.advisor

• Esther Duflo and Abhijit Banerjee.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/45906

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/45906