Ebook An Evaluation of Financial Institutions: Impact on Consumption and Investment using Panel Data and the Theory of Risk-Bearing
There has been little theory-based assessment of formal and informal financial institutions which uses not only financial statements and institutional detail but also household panel data actual customers. Here we explicitly incorporate the diversity of shocks across households in an environment with productive opportunities in a choice model of financial participation. We use the theory of an optimal allocation of risk bearing to derive both consumption and investment equations for customers of financial institutions. We also do the same for those in financial autarky. Finally, we make participation endogenous and evaluate the formal and informal financial institutions offering savings, credit and insurance.
We make use of a relatively unusual data base, the Townsend Thai data, a panel of approximately 960 households, including about 200 running their own businesses. The data start in May 1997, just prior to the onset of the crisis, through 2001, that is, through the recovery. Thus there is macro, aggregate risk. The data are gathered from households and small businesses specialized in different mixes of occupations and subject to different shocks. Thus there is ample idiosyncratic risk. The data contain the measurements of consumption, investment, and income necessary to carry out the standard risk-bearing or equivalent-with-complete-market tests. Further, the data record the actual use of formal and informal financial institutions and mechanisms by type of financial product, both borrowing and saving. From this we can see which devices are used and gauge the plausibility of econometric instruments for subsequent actual participation. The instruments are derived from a baseline key informant interview and from a baseline 1996 village level census from the Community Development Department (CDD). One of the instruments makes use of a Geographic Information System (GIS).
The principal findings offer a score card or rating system for the major financial institutions of the country. A government development bank (the BAAC) and commercial banks as a group are shown to be particular helpful in smoothing consumption and investment. Surprisingly the informal sector seems most helpful in investment, not consumption smoothing. Production Credit Groups, a type of village-level fund, and Agricultural Cooperatives do not seem to have significant impact.
The paper is outlined as follows. Section 2 describes the data used in the analysis. In Section 3 we present the basic choice model of financial regimes featuring the assumed environment. In Section 4 we derive from the theory of the optimal allocation of risk the explicit consumption and investment equations used in the empirical work. In Section 5 we do the same for those in financial autarky. In section 6 we derive the econometric specification, including how we use the data and our instruments. The assessed impact of each major financial institution is summarized in Section 6. Finally, Section 7 presents the estimates of impact equations and some concluding remarks.
Posted in :
