Empirical Essays on Finance and Development

The central focus of this dissertation is the role of financial instruments, in particular insurance and credit, in economic development. Motivated by the observation that exposure to the risk of extreme weather conditions may constrain investment by subsistence farmers and lead to inefficient production choices, the first chapter evaluates whether insuring farmers against such risks alters resource allocation decisions. In particular I consider the effects of a Mexican government disaster relief program with insurance-like features. The results, based on a regression discontinuity design, indicate that insurance against losses arising from natural disasters changes how rural households invest in their farms. Insured farmers utilize more expensive capital inputs and adopt different technologies. Additionally, the insurance changes labor supply patterns. Notably, members of insured households are approximately 10% more likely to migrate internationally. Additional results, that the program matters most when the returns to migration are more unpredictable, are consistent with a model where insurance obviates the need for precautionary savings, allowing households to finance international migration. Turning from insurance to the role of access to credit in furthering development, the second chapter considers how interest rate ceilings affected investment in agricultural capital and the tenure status of farms in the nineteenth century United States. Using within state variation in usury laws, I find that more restrictive laws lead to an economically meaningful reduction in agricultural investment. Additionally, the results pertaining to the tenure status of farms indicate that exacting usury laws reduce the share of owner-operated farms. This effect is especially pronounced for small farms, which is consistent with the notion that interest rate limits ration small-scale, risky farmers out of the credit market. To overcome the issue of omitted factors which may affect both legislation and agricultural outcomes, I employ an instrumental variables strategy. By isolating variation in usury laws associated with the historical presence of religious bodies, this study provides evidence of a causal channel from more permissive interest rate ceilings to greater agricultural investment and a more egalitarian ownership structure of agricultural land. The third chapter departs from the more narrow focus on the provision of financial services and addresses a question of relevance to development economics in general. In particular, this chapter, which is joint work with Abhijit Banerjee, Esther Duflo and Raghabendra Chattopadhyay, evaluates how well various systems for identifying and targeting assistance to the poorest of the poor actually identify the poorest. Firstly, we consider the methods used to identify households eligible for participation in assistance programs administered by the Indian government. Secondly, we evaluate Participatory Rural Appraisals (PRAs) as a mechanism to identify exceptionally poor households. Finally, we investigate whether additional verification of information gathered in PRAs improves targeting. For each method of targeting, we examine whether the households identified by that process are more disadvantaged according to several measures of economic well-being than households which were not identified. We conclude that PRAs and PRAs coupled with additional verification successfully identify a population which is measurably poorer in various respects, especially those which are more readily observed. The standard government procedures, however, do not appear to target the very poorest for assistance. Based on this sample, households targeted for government assistance are observationally equivalent to those that are not. Thesis Supervisor: Esther Duflo Title: Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics, Department of Economics Thesis Supervisor: Shawn A. Cole Title: Assistant Professor of Business Administration, Harvard Business School