Follow the money not the cash: Comparing methods for identifying consumption and investment responses to a liquidity shock

Dean Karlan*, Adam Osman, Jonathan Zinman

*Corresponding author for this work

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

Measuring the impacts of liquidity shocks on spending is difficult methodologically but important for theory, practice, and policy. We compare three approaches for tackling this question: directly asking borrowers how they spend proceeds from a loan (direct elicitation); asking borrowers using a list randomization technique (indirect elicitation) that allows them to answer discretely in cases where loan uses are at odds with lender policies or social norms; and, a counterfactual analysis in which we compare household and enterprise cash outflows for those in a treatment group, randomly assigned to receive credit, to a control group. The counterfactual analysis yields an estimate that about 100% of loan-financed spending is on business inventory. For the direct and indirect elicitations, we find evidence of both strategic misreporting and "following the cash": borrowers likely report what they physically did with cash proceeds, rather than counterfactual spending.

Original languageEnglish (US)
Pages (from-to)11-23
Number of pages13
JournalJournal of Development Economics
Volume121
DOIs
StatePublished - Jul 1 2016

Keywords

  • Consumption
  • Fungibility
  • Investment
  • Liquidity constraint
  • Liquidity shock
  • Loan use
  • Microcredit
  • Microenterprise

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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