Course Description

This course is about how to evaluate the financial systems of developing economies. Specifically, this course evaluates the impact of financial institutions, markets, and policies on growth, inequality, poverty, and the welfare of households and businesses. The financial system comprises the role of informal and formal financial sectors in the intermediation of savings and credit and the allocation of idiosyncratic and aggregate risk. If markets and institutions were perfect, and there were no policy distortions, then certain benchmark standards would be implied. Relative to these benchmarks, there are many anomalies in developing economies, even for those using formal credit and savings instruments. Likewise, various government program innovations and plausibly exogenous variation in access to intermediation have had nontrivial impact on households and businesses. More generally, enhanced finance is established to be correlated with and causally related to growth of GDP and poverty reduction, though with mixed consequences for the distribution of income.

A repeated theme is the description of an entire economy as an integrated micro-macro system, with the choices of diverse individual agents aggregated up to explain macro variables. Choices are shown to be constrained by real obstacles to trade, e.g., moral hazard, adverse selection, limited liability, collateral/default and transactions costs, but markets and contracts may be incomplete even beyond the associated, revised benchmark standards. Mechanism design and contract theory are featured. More generally, policy variables play an important role in choices and outcomes. Thus, there are nontrivial gains and losses to financial policy variation.

PowerPoint Presentations & Class Notes

Below are selected PowerPoint presentations and class notes on a variety of related topics. Check back for updates, as additional materials on enterprise will be added.

Using the Thai financial crisis as a natural experiment, the authors use a model of occupational choice to estimate entrepreneurial talent and reach conclusions about entrepreneurial heterogeneity. Paulson and Townsend discuss the increase in entrepreneurship following the crisis, as well as the importance of this entrepreneurial talent -- albeit unobservable -- for investment, output, and economic growth.

Chris Udry of Yale University examines economic change in Ghana over the period 1987-2006 in this presentation. He documents trends in entrepreneurship as part of preparations for a Ghana panel survey and associated interventions. Specifically, Udry focuses on changes in economic activity at the mirco level, such as new enterprises and increased specialization among entrepreneurs.

This presentation begins with an overview of large-scale, comprehensive panel surveys conducted in Ghana and India by Yale's Economic Growth Center. The second portion describes work done by Mark Rosenzweig and Kaivan Munshi that utilizes survey data to examine India's caste system and its effect on the leadership competence of local governments, an important analysis on community networks and development.

Enterprises run by households are a major economic factor, particularly in developing countries. This short presentation develops methods to compute, estimate, and test across a wide range of financial access models in order to best describe investment and consumption. Findings are based on a working paper of the same title.

Measuring microenterprise profits can be difficult due to a lack of paper records, but Chris Woodruff uses survey data on enterprises in Sri Lanka to examine profits and revenue/cost measures. He finds a low correlation between cash flow and profit, potentially due to timing mismatches in inventory, recall issues, and deliberate misreporting by business owners.

Cynthia Kinnan of MIT presents on distinguishing barriers to insurance in rural Thailand. She examines three major barriers: limited commitment, moral hazard and hidden income. Kinnan indicates the importance of knowing why insurance is incomplete, as it has important implications for policy such as taxation, aid targeting, and safety net design.

These notes discuss the creation of the balance statement, income statement, and statement of cash flows for households in developing countries, specifically Thailand. This is done with the goal of better measurement of productivity, risk, and the financial situation in an analysis of high frequency panel data. A monograph of same title is available at Cambridge Press.