Financial Inclusion and Contract Terms: Experimental Evidence from Mexico

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Aprajit Mahajan (UC Berkeley)
5 Oct 2018 (Friday)
3:00 - 4:30 pm
Conference Room 6045, 6th floor, Lee Shau Kee Business Building, HKUST

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Abstract

This paper provides evidence on the difficulty of expanding access to credit through large institutions. We use detailed observational data and a large-scale countrywide experiment to examine a large bank’s experience with a credit card that accounted for approximately 15% of all first-time formal sector borrowing in Mexico in 2010. Borrowers have limited credit histories and high exit-risk – a third of all study cards are defaulted on or cancelled during the 26 month sample period. We use a large-scale randomized experiment on a representative sample of the bank’s marginal borrowers to test whether contract terms affect default. We find that large experimental changes in interest rates and minimum payments do little to mitigate default risk. We also use detailed data on purchases and payments to construct a measure of bank revenue per card and find it is generally low and difficult to predict (using machine learning methods), perhaps explaining the bank’s eventual discontinuation of the product. Finally, we show that borrowers generating a favorable credit history are much more likely to switch banks providing suggestive evidence of a lending externality. Taken together these facts highlight the difficulty of increasing financial access using large formal sector financial organizations.

Presentation Slides

About the Speaker

Aprajit Mahajan is a professor in the Department of Agricultural and Resource Economics at UC Berkeley. His research has been in the fields of econometric theory, development and applied econometrics. His past studies have looked at child nutrition, financing bednet provision, and firm management in India.

This academic seminar is co-organized with the Department of Economics, HKUST. 

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