DP9773 Follow the Money: Methods for Identifying Consumption and Investment Responses to a Liquidity Shock

Author(s): Dean S. Karlan, Adam Osman, Jonathan Zinman
Publication Date: December 2013
Keyword(s): consumption, fungibility, investment, liquidity constraint, liquidity shock, loan use, microcredit, microenterprise
JEL(s): D12, D22, D92, G21, O12, O16
Programme Areas: Labour Economics, Financial Economics, Development Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9773

Identifying the impacts of liquidity shocks on spending decisions is difficult methodologically but important for theory, practice, and policy. Using seven different methods on microenterprise loan applicants, we find striking results. Borrowers report uses of loan proceeds strategically, and more generally their reporting depends on elicitation method. Borrowers also interpret loan use questions differently than the key counterfactual: spending that would not have occurred sans loan. We identify the counterfactual using random assignment of loan approvals and short-run follow-up elicitation of major household and business cash outflows, and estimate that about 100% of loan-financed spending is on business inventory.