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on Development |
| By: | Persson, Torsten; Tabellini, Guido |
| Abstract: | We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital - measured by a nation's historical experience with democracy and by the incidence of democracy in its neighborhood - reduces the exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth in an indirect way by decreasing the probability of a sucessful coup. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy. |
| Keywords: | economic growth; hazard rates; political regimes |
| JEL: | D70 H11 N10 O11 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5654&r=dev |
| By: | Cavalcanti, Tiago; Tavares, José |
| Abstract: | The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy, namely an increase in the share of government spending in GDP and an increase in female labour force participation. This paper suggests that these two changes are causally related. We develop a growth model where the structure of the economy is endogenous so that participation in market activities and government size are causally related. Economic growth and rising incomes are accompanied by a greater incentive for women to engage in labour market activities as the opportunity cost of staying at home increases. We hypothesize that government spending decreases the cost of performing household chores such as, but not limited to, child rearing and child care so that couples decide to engage further in the labour market and chose a higher tax rate to finance more government spending. Using a wide cross-section of data for developed and developing countries, we show that higher participation by women in the labour market are indeed positively associated with larger governments. Furthermore, we investigate the causal link between the two variables using as instrumental variables a unique and novel dataset on the relative price of home appliances across OECD countries and over time. We find strong evidence of a causal link between participation in the labour market and government size: a 10 percent rise in participation in the labour market leads to a 7 to 8 percent rise in government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998). The inclusion of an endogenous choice of government spending allows a considerable extension of the model in Galor and Weil (2000) so fertility can either rise or fall and phenomena like the baby boom and baby bust in Greenwood at el. (2002) can be addressed. In addition, the paper has important implications for the analysis of the secular as well as cross-country determinants of government size. |
| Keywords: | government size; growth; structural transformation |
| JEL: | E62 J1 O1 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5667&r=dev |
| By: | Piketty, Thomas; Qian, Nancy |
| Abstract: | This paper evaluates the prospects for income tax reform in China during the coming decade (with a comparison to India), and argues that such reforms should rank high on the policy agenda in these two countries. Due to high average income growth and sharply rising top income shares during the 1990s and early 2000s, progressive income taxation is about to raise non-trivial tax revenues in China and India and to become an important political object. According to our projections, the income tax should raise at least 4% of Chinese GDP in 2010 (versus less than 1% in 2000 and 0,1% in 1990), in spite of the 20% nominal rise in the exemption threshold that took effect in 2004. The fact that progressive income taxation is becoming an important policy tool has important consequences for China’s ability to finance social spending and to keep under control the rise in income inequality associated to globalization and growth. Due to faster income growth and to a higher fraction of wage earners in the labor force, the prospects for income tax development look better in China than in India. This potential is however limited by the fact that Chinese top wage-earners are under-taxed relatively to top non-wage income earners. |
| Keywords: | income distribution; income taxation |
| JEL: | E25 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5703&r=dev |
| By: | Easterly, William; Gatti, Roberta; Kurlat, Sergio |
| Abstract: | Using a newly assembled dataset spanning from 1820 to 1998, we study the relationship between the occurrence and magnitude of episodes of mass killing and the levels of development and democracy across countries and over time. Mass killings appear to be more likely at intermediate levels of income and less likely at very high levels of democracy. However, the estimated relationship between democracy and probability of mass killings is not linear in the full sample. In the 20th century, discrete improvements in democracy are systematically associated with episodes involving fewer victims. |
| Keywords: | democracy; growth; mass killings |
| JEL: | N40 O10 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5715&r=dev |
| By: | de Melo, Jaime; Gourdon, Julien; Maystre, Nicolas |
| Abstract: | Using tariffs as a measure of openness, this paper finds consistent evidence that the conditional effects of trade liberalization on inequality are correlated with relative factor endowments. Trade liberalization is associated with increases in inequality in countries well-endowed in highly skilled workers and capital or with workers that have very low education levels, and in countries relatively well-endowed in mining and fuels while it is associated with decreases in inequality in countries that are wellendowed with primary-educated labor. Similar results are also apparent when decile data are used instead of the usual Gini coefficient. The results are strongly supportive of the factor-proportions theory of trade and suggest that trade liberalization in poor countries where the share of the labor force with little education is high raises inequality, although in our sample relative endowments in capital turn out to be the overriding determinant so that trade liberalization is accompanied by reduced income inequality in low-income countries. Simulation results also suggest that relatively small changes in inequality as measured by aggregate measures of inequality like the Gini coefficient are magnified when estimates are carried out using decile data. |
| Keywords: | income distribution; international trade; poverty |
| JEL: | D3 F11 F16 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5738&r=dev |
| By: | Harstad, Bård; Svensson, Jakob |
| Abstract: | Why are firms more likely to pay bribes to bureaucrats to bend the rules in developing countries while they instead lobby the government to change the rules in more developed ones? Should we expect an evolution from bribing to lobbying, or can countries get trapped in a bribing equilibrium forever? Corruption and lobbying are to some extent substitutes. By bribing, a firm may persuade a bureaucrat to "bend the rules" and thus avoid the cost of compliance. Alternatively, firms may lobby the government to "change the rules". But there are important differences. While a change in the rules is more permanent, the bureaucrat can hardly commit not to ask for bribes also in the future. Based on this assumption, we show that (i) an equilibrium with corruption discourages firms to invest, (ii) firms bribe if the level of development is low, but (iii) they switch to lobbying if the level of development is sufficiently high. Combined, the economy might evolve from a bribing to a lobbying equilibrium, but too large bribes may discourage the necessary investments for lobbying eventually to become an equilibrium. The outcome is a poverty trap with pervasive corruption. This poverty trap is more likely if penalties on corruption are large and the regulatory costs are high. |
| Keywords: | corruption; development; lobbying |
| JEL: | D72 D92 O16 O17 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5759&r=dev |
| By: | Obstfeld, Maurice |
| Abstract: | In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China’s large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exchange rate pressures once the RMB/basket rate is allowed to move flexibly within a band, and they are best postponed until domestic foreign exchange markets develop further, the exchange rate is fully flexible, and the domestic financial system has been strengthened and placed on a market-oriented basis. |
| Keywords: | China balance of payments; China currency; fixed exchange rate exit strategy; renminbi |
| JEL: | F32 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5771&r=dev |
| By: | Attanasio, Orazio; Fitzsimons, Emla; Gomez, Ana; Lopez, Diana; Meghir, Costas; Mesnard, Alice |
| Abstract: | The paper studies the effects of Familias en Acción, a conditional cash transfer programme implemented in rural areas in Colombia in 2002, on school enrolment and child labour. Using a quasi-experimental approach, our methodology makes use of an interesting feature of the data, which allows us to identify anticipation effects. Our results show that the programme increased school participation of 14 to 17 year old children quite substantially, by between 5 and 7 percentage points, and had lower, but non-negligible effects on enrolment of younger children of between around 1.5 and 2.5 percentage points. In terms of work, the effects are generally largest for younger children whose participation in domestic work decreased by around 10 to 12 percentage points after the programme but whose participation in income-generating work remained largely unaffected by the programme. We also find evidence of school and work time not being fully substitutable, suggesting that some, but not all, of the increased time at school may be drawn from children’s leisure time. |
| Keywords: | child labour; conditional cash transfers; education |
| JEL: | I28 I38 J22 O15 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5792&r=dev |
| By: | Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B |
| Abstract: | Recent research convincingly shows that crises beget reform. Although the consensus is that economic crises foster macroeconomic stabilization, it is silent on which types of crises cause which types of reform. Is it economic or political crises that are the most important drivers of structural reforms? To answer this question we put forward evidence on trade and labour market liberalization from panel data on more than 100 developed and developing countries from 1950 to 2000. We find important differences in the effects of the two types of crises on the two reforms across regions and even from one measure of crisis to another. Yet, in general, we consistently find that political considerations (political crises as well as political institutions) are more important determinants of these reforms than economic crises. This finding is robust to the inclusion of interdependencies between the two types of crises, feedbacks between the two types of reform, the use of alternative measures of political and economic crises and whether or not the data are pooled across all countries or only across regions. |
| Keywords: | economic crisis; economic reform; labour market reform; political crisis; trade liberalisation |
| JEL: | E32 H11 K20 O40 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5805&r=dev |
| By: | Lederman, Daniel; Olarreaga, Marcelo; Payton, Lucy |
| Abstract: | The number of national export promotion agencies (EPAs) has tripled over the last two decades. While more countries made them part of their national export strategy, studies criticized their efficiency in developing countries (Hogan, Keesing and Singer, 1991). Partly in reaction to these critiques, EPAs have been retooled (see ITC, 1998 or 2000 for example). This paper studies the impact of existing EPAs and their strategies, based on a new data set covering 104 developing and developed countries. Results suggest that on average they have a strong and statistically significant impact on exports. For each $1 of export promotion, we estimate a $300 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned small is beautiful. |
| Keywords: | developing countries; export promotion agencies |
| JEL: | F13 O19 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5810&r=dev |
| By: | Desmet, Klaus; Parente, Stephen |
| Abstract: | This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory. |
| Keywords: | imperfect competition; Lancaster preferences; market size; technology adoption |
| JEL: | F12 O13 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5825&r=dev |
| By: | Girma, Sourafel; Gong, Yundan; Görg, Holger |
| Abstract: | We investigate whether inward FDI, either at the firm or industry level, has any impact on product innovation by Chinese State owned enterprises (SOEs). We use a comprehensive firm level panel data set of Chinese SOEs covering the period 1999 to 2003. Our results show that foreign capital participation is associated with higher innovative activity. Inward FDI in the sector has a negative effect on innovative activity in SOEs. However, there is a positive effect of FDI on SOEs that export, invest in human capital or R&D, or have prior innovation experience. We also find that SOEs with internal R&D activity and human capital development are successful innovators. Hence, our results suggest that rather than relying on sector level inward FDI to improve domestic innovative activity, it is important to get the firm-level fundamentals right. |
| Keywords: | China; competition; FDI; innovation; spillovers; state-owned enterprises |
| JEL: | F23 O31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5838&r=dev |
| By: | Marimon, Ramon; Quadrini, Vincenzo |
| Abstract: | We study how barriers to competition - such as, restrictions to business start-up and strict enforcement of covenants or IPR - affect the investment in knowledge capital when contracts are not enforceable. These barriers lower the competition for human capital and reduce the incentive to accumulate knowledge. We show in a dynamic general equilibrium model that this mechanism has the potential to account for significant cross-country income inequality. |
| Keywords: | contract enforcement; economic growth; human capital |
| JEL: | L14 O4 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5840&r=dev |
| By: | Kose, Ayhan; Prasad, Eswar; Rogoff, Kenneth; Wei, Shang-Jin |
| Abstract: | The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. We attempt to provide a unified conceptual framework for organizing this vast and growing literature. This framework allows us to provide a fresh synthetic perspective on the macroeconomic effects of financial globalization, both in terms of growth and volatility. Overall, our critical reading of the recent empirical literature is that it lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances. On the other hand, there is little systematic evidence to support widely-cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises. |
| Keywords: | capital account liberalization; developing countries; financial crises; financial integration; growth and volatility |
| JEL: | F02 F21 F36 F4 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5842&r=dev |
| By: | Lane, Philip R.; Schmukler, Sergio |
| Abstract: | Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China’s FDI liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are “short equity, long debt.” Third, China and India have improved their net external positions over the last decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies; domestic financial sector policies; and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset/liability holdings) and, consequently, the international financial system. |
| Keywords: | capital flows; China; financial integration; India; world economy |
| JEL: | F02 F30 F31 F32 F33 F36 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5852&r=dev |
| By: | Hunt, Jennifer |
| Abstract: | Using cross-country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non-victims to bribe public officials. Misfortune increases victims' demand for public services, raising bribery indirectly, and also increases victims' propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune. |
| Keywords: | bribery; corruption; governance |
| JEL: | H1 K4 O1 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5855&r=dev |
| By: | Hasan, Iftekhar (BOFIT); Wachtel , Paul (BOFIT); Zhou, Mingming (BOFIT) |
| Abstract: | There have been profound changes in both political and economic institutions in China over the last twenty years. Moreover, the pace of transition has led to variation across the country in the level of development. In this paper, we use panel data for the Chinese provinces to study the role of legal institutions, financial deepening and political pluralism on growth rates. The most important institutional developments for a transition economy are the emergence and legalization of the market economy, the establishment of secure property rights, the growth of a private sector, the development of financial sector institutions and markets, and the liberalization of political institutions. We develop measures of these phenomena, which are used as explanatory variables in regression models to explain provincial GDP growth rates. Our evidence suggests that the development of financial markets, legal environment, awareness of property rights and political pluralism are associated with stronger growth. |
| Keywords: | economic growth; institutions; financial markets; China |
| JEL: | O16 O53 P14 P16 |
| Date: | 2006–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2006_012&r=dev |
| By: | John Giles (Michigan State University and IZA Bonn); Ren Mu (World Bank) |
| Abstract: | Recent research has shown that participation in migrant labor markets has led to substantial increases in income for families in rural China. This paper asks how participation is affected by elder parent health. We find that younger adults are less likely to work as migrants when a parent is ill. Poor elder parent health has less impact on the probability of employment as a migrant when an adult child has siblings who may be available to provide care. We also highlight the potential importance of including information on non-resident family members when studying how parent illness and elder care requirements influence the labor supply decisions of adult children. |
| Keywords: | migration, health, aging, rural China |
| JEL: | O12 O15 I12 J14 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2333&r=dev |
| By: | Paolo Figini (University of Bologna); Holger Görg (University of Nottingham and IZA Bonn) |
| Abstract: | We use a panel of more than 100 countries for the period 1980 to 2002 to analyse the relationship between inward foreign direct investment (FDI) and wage inequality. We particularly check whether this relationship is non-linear, in line with a theoretical discussion. We find that the effect of FDI differs according to the level of development: we depict two different patterns, one for OECD (developed) and one for non-OECD (developing) countries. Results suggest the presence of a non linear effect in developing countries; wage inequality increases with FDI inward stock but this effect diminishes with further increases in FDI. For developed countries, wage inequality decreases with FDI inward stock and there is no robust evidence to show that this effect is non-linear. |
| Keywords: | foreign direct investment, wage inequality, multinational firms |
| JEL: | D63 F23 J31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2336&r=dev |
| By: | Dwayne Benjamin (University of Toronto); Loren Brandt (University of Toronto); John Giles (Michigan State University and IZA Bonn) |
| Abstract: | We explore the relationship between the level of village inequality in 1986, and the subsequent growth of household incomes from 1986 to 1999. Using a detailed householdlevel data set from rural China, we find robust evidence that initial inequality is negatively related to subsequent household income growth. We are able to address a number of econometric issues that affect the use of aggregate data for this exercise, especially measurement error and aggregation: Our results strongly suggest that village inequality has an external adverse impact on household-level income trajectories. However, once we account for possibly fixed village-level unobserved heterogeneity, we find no evidence that changes in inequality are correlated with household income growth: Whatever factor drives the inequality-growth relationship only operates in the “long run.” We explore several possible avenues by which initial inequality – or an unobserved variable correlated with it – affects household income growth. While we do not find the precise mechanism, our findings point toward a class of explanations based on collective choice (like the provision of public goods or determination of local taxes), and away from credit-market based explanations. |
| Keywords: | inequality, growth, rural China, panel data |
| JEL: | O12 O15 P20 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2344&r=dev |
| By: | Isabel Günther (University of Göttingen); Andrey Launov (University of Würzburg and IZA Bonn) |
| Abstract: | It has been recently argued that the informal sector of the labor market in a developing economy shows a dual structure with one part of it being competitive to the formal sector and another part being the result of market segmentation. To test this hypothesis we formulate an econometric model which allows for a heterogeneous informal sector with unobserved individual affiliation and which takes into account selection bias induced by the employment decision of individuals. Our test results for the urban labor market in Côte d'Ivoire indeed show existence of both competitive and segmented employment in the informal sector. |
| Keywords: | developing economy, informal labor market, segmentation, comparative advantage, selection bias, latent structure, finite mixture models |
| JEL: | J42 O17 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2349&r=dev |
| By: | Richard Akresh (University of Illinois at Urbana Champaign and IZA Bonn); Philip Verwimp (Institute of Social Studies, The Hague) |
| Abstract: | Economic shocks at birth have lasting impacts on children’s health several years after the shock. We calculate height for age z-scores for children under age five using data from a Rwandan nationally representative household survey conducted in 1992. We exploit district and time variation in crop failure and civil conflict to measure the impact of exogenous shocks that children experience at birth on their height several years later. We find that girls born after a shock in a region experiencing these events exhibit 0.72 standard deviations lower height for age z-scores and the impact is worse for poor households. There is no impact of these shocks on boys’ health status. Results are robust to using household level production and rainfall shocks as alternative measures of crop failure. The analysis also contributes to the debate on the economic conditions prevailing on the eve of the Rwandan genocide. |
| Keywords: | child health, economic shocks, civil war, rainfall shocks, Africa |
| JEL: | I12 J13 O12 O15 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2359&r=dev |
| By: | Manuela Angelucci (University of Arizona and IZA Bonn); Orazio Attanasio (University College London, NBER, BREAD and CEPR) |
| Abstract: | In this paper we discuss several methodological issues related to the identification and estimation of Average Treatment on the Treated (ATT) effects in the presence of low compliance. We consider non-experimental data consisting of a treatment group, where a program is implemented, and of a control group that is non-randomly drawn, where the program is not offered. Estimating the ATT involves tackling both the non-random assignment of the program and the non-random participation among treated individuals. We argue against standard matching approaches to deal with the latter issue because they are based on the assumption that we observe all variables that determine both participation and outcome. Instead, we propose an IV-type estimator which exploits the fact that the ATT can be expressed as the Average Intent to Treat divided by the participation share, in the absence of spillover effects. We propose a semi-parametric estimator that couples the flexibility of matching estimators with a standard Instrumental Variable approach. We discuss the different assumptions necessary for the identification of the ATT with each of the two approaches, and we provide an empirical application by estimating the effect of the Mexican conditional cash transfer program, Oportunidades, on food consumption. |
| Keywords: | program evaluation, treatment effects |
| JEL: | C31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2368&r=dev |
| By: | Abdelkrim Araar |
| Abstract: | In this paper we provide a set of rules that can be used to check poverty or inequality dominance using discrete data. Existing theoretical rules assumes continuity in incomes or in percentiles of population. In reality, with the form of household surveys, this continuity does not exist. However, the said discontinuity can be exploited in testing the stochastic dominance. Moreover, in this paper, we proprose the stochastic dominance conditions that take into account the statistical robustness in testing the stochastic dominance. Findings of this paper are illustrated using the Burkina Faso's household surveys for the years of 1994 and 1998. |
| Keywords: | Stochastic Dominance, Poverty, Inequality |
| JEL: | D63 D64 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0634&r=dev |
| By: | F. Calidoni-Lundberg; A. Fedele |
| Abstract: | We collect data from three Italian microcredit institutions which operate in urban areas by granting individual loans to two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations).Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza- Webb and we verify that repayment rate increases, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, extracts information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers are less likely to know each other and social sanctions are weak. |
| Keywords: | Microcredit, Urban areas, Production Team Lending, Adverse Selection |
| JEL: | D82 L31 O12 O16 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2006-ep11&r=dev |