Doctoral Dissertation Research: Self-Help and Self-Government: How Local Governments Affect Microcredit Provision in South India

Brown University, Providence RI

Investigators

Abstract

This project investigates the interaction between microcredit groups (groups of low-income women who receive small, no-collateral, joint-liability loans) and local popular government in rural South India. Preliminary results from a limited dataset suggest that the gender of the local political leader has a strong impact on the quantity of credit received by microcredit groups in the leader's constituency; this is puzzling, because the leaders have no formal role in the provision of these loans. This project uses data gathered from an administrative block in Tamil Nadu, India to test different hypotheses about the mechanism by which leaders can increase lending and the motivation for why female leaders increase lending more than male leaders. The core of the project consists of two surveys, a survey of all group leaders and a survey of 5 randomly selected members from each group. The leader survey elicits information on the loans received by the group over the last 10 years; other general information on the group, such as the year of formation and the bank that the group is associated with; and a membership roster for the group. This roster forms the sample frame for the member survey, which elicits information on the household structure of the group member; information on the benefits her household has received through government schemes; and information on her relationship with local political leaders. These surveys are supplemented with election data for each term in each constituency, including data on which constituencies have been quasi-randomly reserved for female candidates by the government. Using this data, it is possible to test the hypothesis that female leaders increase lending in their constituencies by assuaging the bank's concern that the groups might default on their loans, and that they do this more than male leaders because it is cheaper for the bank to give female leaders a payoff due to the structure of loan subsidies in India. By testing to see if fluctuations in the rate of subsidization had differential effects on unsubsidized lending under male versus female leaders, it is possible to rule out the competing hypothesis that female leaders get more credit for their groups because they feel more altruism towards those groups than do male leaders. If unsubsidized lending under female leaders reacts more positively to increases in subsidies than unsubsidized lending under male leaders, this is evidence against the altruism hypothesis. This project has significant intellectual merit. It brings together two strands of the economics literature, on the determinants of action by politicians and on the credit market failures solved by microcredit. It is the first study to test how differnces in pre-existing outside institutions can affect the success of microlending, and the first study to present and test a specific model of how women's reservations can affect the market for a private good. The quasi-random selection process used for women's reservations makes the identification strategies used in the data analysis straightforward and quite robust, so that the results cannot be attributed to reverse or joint causality. This project could also have a broader impact on the Indian government's reservation policy towards groups historically subject to discrimination, including women. Currently, the Indian government reserves one-third of constituencies for female candidates; if the results of this project show that female leaders are better at resolving credit market failures than male leaders, that is information that should be taken into account while considering the optimal level of women's reservations. However, on a more conceptual level, the results of this project may challenge the purpose of the reservation policy; if female leaders are motivated to solve these credit market failures by government subsidies rather than by altruism towards other women, there is no compelling reason why men could not do as well as women if motivated by the proper policy.