Roads and Loans


Abhiroop Mukherjee
7 Mar 2018 (Wednesday)
4:30 - 5:30 pm
IAS2042, Lo Ka Chung Building, Lee Shau Kee Campus, Hong Kong University of Science and Technology

Live Broadcast

Event Summary

Does the flow of financing respond to changes in productive opportunities even for the world's poor? In his academic seminar, Abhiroop Mukherjee (HKUST) presents research which examined the response of private bank financing to a shock to the rural road network in India, bringing road access to hitherto unconnected villagers. One of the basic tenets of finance is that capital should flow to its most productive uses, so when productive opportunities improve, financing should flow to those who see these gains, allowing them to fully realize potential benefits.

In many parts of the world, infrastructure projects - in particular roads - are thought to be key to unlocking productivity increases. But the type of productive opportunities policy makers often 
talk about are examples of trickle down benefits such as opening or expanding small businesses, like village grocery shops, allowing surplus agricultural laborers to commute to nearby towns to access more productive jobs, or changing crop patterns from subsistence cereal farming to more profitable market-based crops. Many of these channels, however, require availability of financing that is assumed will automatically follow once roads are built. However, many rural economies suffer from chronic problems of financing. Formal finance is largely absent in many parts of the world, and informal money lenders charge usurious interest rates, tying down laborers to dismal conditions.

So a central question today in Finance is: Will financing indeed flow in response to changing productive opportunities created by these mega infrastructure projects? Moreover, even if financing does follow infrastructure improvements, will it disproportionately benefit the relatively rich villagers who had assets prior to the infrastructure being built, and were in a better position to exploit the resultant opportunities? Or will it benefit the poorer parts of the society more - people who were excluded from formal finance before, perhaps due to their lack of collateralizable assets, but can now find a way in?

The study finds that private financing does indeed respond to changes in productive opportunities resulting from connectivity - over 50% more villagers receive loans, and the average amount lent to them is 30% higher – for villages right above the threshold compared to those just below. Private financing seems to flow disproportionately to villagers with basic education who lack collateralizable assets. Mukerjee’s results have important implications for understanding trickle down benefits of infrastructure building and its distributional consequences.

Presentation Slides

About the Speaker

Abhiroop Mukherjee is an Associate Professor of Finance at HKUST, which he joined in 2010 after receiving his PhD in Economics from Yale University. He studies issues related to behavioral and institutional finance, and has a keen interest in emerging markets. Abhiroop’s research has been published in all of the three top academic journals in finance, and some of his work has also been used in applied settings by banks, hedge funds and think tanks, both in Asia and in the U.S.

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