Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis (WP-16-13)
Emily Breza and Cynthia Kinnan
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 nationwide shock to the liquidity of lenders, especially those lenders with loans in the affected state. The two researchers use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, entrepreneurship, and employment. Using a proprietary, hand-collected district-level data set from 27 microlenders matched with household data from the National Sample Survey, they find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings, and consumption. In contrast to many experimental studies of microfinance, their estimates capture the average impacts on households, inclusive of general equilibrium effects. Moreover, they find significant heterogeneity by household landholdings, consistent with a model in which medium-wealth households scale back their businesses and landless households are hit by a fall in the wage.