Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis (WP-18-07)
Emily Breza and Cynthia Kinnan
In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nationwide shock to the liquidity of lenders, especially those with loans in the affected state. The researchers use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium. Using a proprietary, hand-collected district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, they find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings, and consumption. They also find that wages in the nontradable sector fall more than in the tradable sector (agriculture), suggesting that one important impact of the microfinance contraction was transmitted through its effect on aggregate demand. Breza and Kinnan present a simple two period, two-sector model of the rural economy illustrating this channel and show that their wage results are consistent with a simple calibration of the model.