Citation

Discussion Paper Details

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

Author(s): Dean S. Karlan, Adam Osman and Jonathan Zinman

Publication Date: December 2013

Keyword(s): consumption, fungibility, investment, liquidity constraint, liquidity shock, loan use, microcredit and microenterprise

Programme Area(s): Development Economics, Financial Economics and Labour Economics

Abstract: 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.

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Bibliographic Reference

Karlan, D, Osman, A and Zinman, J. 2013. 'Follow the Money: Methods for Identifying Consumption and Investment Responses to a Liquidity Shock'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9773