Publications

Measuring the Return on Household Enterprise: What Matters Most for Whom?

2012-02-01T06:00:00Z

Return on assets (ROA) from household enterprise is crucial for understanding the well being and productivity of households in developing economies. Yet the definition and measurement of household enterprise ROA remain inconsistent or unclear. This paper illustrates potential measurement problems with examples from various actual surveys. The three issues that matter most for accurate measurement of household enterprise ROA are the choice of accrual versus cash basis of income, the treatment of household's own labor in enterprise income, and the treatment of non-factor income. This paper provides thus recommendations on how to improve the survey questionnaires for more accurate measurement in field research. LINK

Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution

2012-02-01T06:00:00Z

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price-islands, created endogenously in equilibrium. LINK

Village Economic Accounts: Real and Financial Intertwined

2012-02-01T06:00:00Z

This paper proposes a framework to generate village economic accounts and village balance of payments accounts from a micro-level household survey. Using the Townsend-Thai data, Paweenawat and Townsend create village economic and balance of payments accounts for rural villages in Thailand. They then examine village economies through the lens of international economics, both real and financial. This includes openness and growth; risk sharing across countries; trade, capital flows, and financial frictions; trade and productivity. LINK

Kinship and Financial Networks, Formal Financial Access and Risk Reduction

2012-02-01T06:00:00Z

Many risks are present in rural developing economies: illness, weather, the sudden need to finance an investment opportunity, etc. Yet for many households in rural developing economies, consumption and investment are insured against short-term, idiosyncratic risks to a large extent, despite limited availability of formal banking and insurance products. The importance of kinship networks in facilitating consumption smoothing and investment financing has been documented in many settings. Yet, while the importance of kinship networks and financial access are each increasingly well-documented, the channels through which these effects occur and the relationship between them are not well understood. Kinnan and Townsend use unique data from rural Thai households to examine this interplay. LINK

The Impacts of Credit on Village Economies

2012-02-01T06:00:00Z

This paper evaluates the short-term impact of Thailand's Million Baht Village Fund program, among the largest scale government microfinance initiative in the world, using pre- and post-program panel data and quasi-experimental cross-village variation in credit-per-household. Kaboski and Townsend find that the village funds have increased total short-term credit, consumption, agricultural investment, income growth (from business and labor), but decreased overall asset growth. They also find a positive impact on wages, an important general equilibrium effect. The findings are broadly consistent qualitatively with models of credit-constrained household behavior and models of intermediation and growth. LINK

The Geographic Concentration of Enterprise in Developing Countries

2011-08-01T05:00:00Z

A nation’s economic geography can have an enormous impact on its development. This paper shows that for Thailand, a high concentration of enterprise in an area predicts high subsequent growth in and around that area. Felkner and Townsend also find spatially contiguous convergence of enterprise with stagnant areas left behind. Exogenous physiographic conditions are correlated with enterprise location and growth. The authors fit a structural, micro-founded model of occupation transitions with fine-tuned geographic capabilities to village data and replicate these salient facts. Key elements of the model include costs, credit constraints on occupation choice, and spatially varying expansion of financial service providers. LINK

A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance Initiative

2011-06-01T05:00:00Z

Kaboski and Townsend use a structural model to understand, predict, and evaluate the impact of an exogenous microcredit intervention program, the Thai Million Baht Village Fund. They model household decisions in the face of borrowing constraints, income uncertainty, and high-yield indivisible investment opportunities. After estimating parameters, the authors evaluate the model's ability to predict and interpret the impact of village fund intervention. LINK

Financial Systems in Developing Economies: Growth, Inequality and Policy Evaluation in Thailand

2011-04-01T05:00:00Z

Unique in its approach and in the variety of methods and data employed, this book is the first of its kind to provide an in-depth evaluation of the financial system of Thailand, a proto-typical Asian developing economy. Using a wealth of primary source qualitative and quantitative data, including survey data collected by Townsend, it evaluates the impact of specific financial institutions, markets for credit and insurance, and government policies on growth, inequality, and poverty at the macro, regional, and village level in Thailand. This work is useful not only as a guide to the Thai economy but more importantly as a means of assessing the impact that financial institutions and policy variation can have at the macro- and micro-level, including the distribution of gains and losses.

For more information on this publication, please visit http://ukcatalogue.oup.com/product/9780199533237.do.

Wealth Accumulation and Factors Accounting for Success

2011-03-01T06:00:00Z

Townsend and Pawasutipaisit use detailed income, balance sheet, and cash flow statements constructed for households in a long monthly panel in an emerging market economy, as well as contributions in economic theory, to document and better understand the factors underlying success in achieving upward mobility in the distribution of net worth. LINK

Financial Structure and Economic Welfare: Applied General Equilibrium Development Economics

2010-04-01T05:00:00Z

This review provides a common framework for researchers thinking about the next generation of micro-founded macro models of growth, inequality, and financial deepening, as well as direction for policy makers targeting microfinance programs to alleviate poverty. Townsend covers topics such as the treatment of financial structure general equilibrium models, designing surveys to capture measures of income, investment/savings, and flow of funds, and aggregating individuals and households to the level of network, village, or national economy. LINK

Welfare Gains from Financial Liberalization

2010-04-01T05:00:00Z

In this paper, Townsend and Ueda address the controversial issue of financial liberalization. Using data from Thailand from 1976 to 1996, the authors find sizable welfare gains from liberalization, though the gain in economic growth is ambiguous. They take the view that financial liberalization is a government policy that alters the path of financial deepening, while financial deepening is endogenously chosen by agents given a policy and occurs in transition towards a distant steady state. LINK

Why Does Misallocation Persist?

2010-01-01T06:00:00Z

A number of papers argue that the misallocation of resources can explain large cross-country TFP differences. This argument is underpinned by empirical evidence documenting substantial dispersion in the marginal products of resources, particularly capital, in developing countries. But why does misallocation persists? That is, why don't distortions disappear on their own? This is particularly true for capital misallocation, a point this paper illustrates in a simple model of capital accumulation with credit constraints: misallocation implies high marginal products for constrained firms and therefore a strong pressure for accumulation and to eliminate the distortion. Banerjee and Moll distinguish between misallocation on the intensive and the extensive margin, and show that the former should disappear asymptotically under fairly general conditions while the latter may persist. LINK

Households as Corporate Firms

2009-12-01T06:00:00Z

This investigation proposes a conceptual framework for measurement necessary for an analysis of household finance and economic development. Samphantharak and Townsend build on and, where appropriate, modify corporate financial accounts to create balance sheets, income statements, and statements of cash flows for households in developing countries, using an integrated household survey. The authors also illustrate how to apply the accounts to an analysis of household finance that includes productivity of household enterprises, capital structure, liquidity, financing, and portfolio management. The conceptualization of this analysis has important implications for measurement, questionnaire design, the modeling of household decisions, and the analysis of panel data.

For more information, please visit http://www.cambridgeuniversitypress.com/us/catalogue/catalogue.asp?isbn=0521195829.

Measuring the Impact of Financial Intermediation: Linking Contract Theory to Econometric Policy Evaluation

2009-09-01T05:00:00Z

Townsend and Urzua study the impact that financial intermediation can have on productivity through the alleviation of credit constraints in occupation choice and/or an improved allocation of risk. They bring together both static and dynamic structural models, as well as reduced form OLS and IV regressions. LINK

Impact of Climate Change on Rice Production in Thailand

2009-05-01T05:00:00Z

This paper evaluates crop yield impacts from likely climate changes for Southeast Asia. To do so, the authors link soil science crop modeling, weather simulators, and global climate change modeling into an integrated economic model of multistage rice production. The economic model is estimated with detailed monthly data on inputs, operations, and environmental data over a five year period. Felkner, Tazhibayeva, and Townsend then forecast impacts under two different future economic scenarios, one assuming high future global anthropogenic1 pollution emissions, and the other assuming low. The authors compare results of the integrated economic model with those of a biophysical model, inputting into both the stochastic realizations of a weather generator, calibrated against the present no-climate benchmark and against the two climate change scenarios-mild and severe. The more realistic forecasts from the socioeconomic model thus include important farmer behavioral/mitigation strategies. LINK Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;}

Financial Innovation and the Transactions Demand for Cash

2009-03-01T06:00:00Z

Several studies report interest rate elasticities for money demand below one half, the value predicted by economic models. It is also widely documented that money holdings decrease as new technologies to economize in the use of cash are introduced. This paper develops a dynamic inventory model for cash balances. The key new ingredient of Alvarez and Lippi's model is the assumption that agents have random opportunities to withdraw cash at no costs. LINK

Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand

2009-02-01T06:00:00Z

This paper examines the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. The authors show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting endogenous reduction in velocity. They also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate. In a quantitative example, this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match U.S. households' holdings of M2. LINK

Endogenous Groups and Dynamic Selection in Mechanism Design

2008-09-01T05:00:00Z

Madeira and Townsend create a dynamic theory of endogenous risk sharing groups, with good internal information, and their coexistence with relative perfomance, individualistic regimes, which are informationaly more opaque. Inequality and organizational form are determined simultaneously. Numerical techniques and succinct re-formulations of mechanism design problems with suitable choice of promised utilities allow the computation of a stochastic steady state and its transitions. Regions of low inequality and moderate to high wealth (utility promises) produce the relative performance regime, while regions of high inequality and low wealth produce the risk sharing group regime. If there is a cost to prevent coalitions, risk sharing groups emerge at high wealth levels also. Transition from the relative performance regime to the group regime tend to occur when rewards to observed outputs exacerbate inequality, while transitions from the group regime to the relative performance regime tend to come with a decrease in utility promises. Some regions of inequality and wealth deliver long term persistence of organization form and inequality, while other regions deliver high levels of volatility. LINK

Growth and Inequality: Model Evaluation Based on an Estimation-Calibration Strategy

2008-09-01T05:00:00Z

This paper evaluates two well-known models of growth with inequality that have explicit micro underpinnings related to household choice. With incomplete markets or transactions costs, wealth can constrain investment in business and the choice of occupation and also constrain the timing of entry into the formal financial sector. Using the Thai Socio-Economic Survey (SES), Jeong and Townsend estimate the distribution of wealth and the key parameters that best fit cross-sectional data on household choices and wealth. They then simulate the model economies for two decades at the estimated initial wealth distribution and analyze whether the model economies at those micro-fit parameter estimates can explain the observed macro and sectoral aspects of income growth and inequality change. Both models capture important features of Thai reality. Anomalies and comparisons across the two distinct models yield specific suggestions for improved research on the micro foundations of growth and inequality. LINK

What is Middle Class about the Middle Classes around the World?

2008-06-01T05:00:00Z

This paper examines the three distinct arguments about the special economic role of the middle class that are traditionally made. In one, new entrepreneurs armed with a capacity and a tolerance for delayed gratification emerge from the middle class and create employment and productivity growth for the rest of society. In a second, perhaps more conventional view, the middle class is primarily a source of vital inputs for the entrepreneurial class: it is their "middle class values" -- their emphasis on the accumulation of human capital and savings -- that makes them central to the process of capitalist accumulation. The third view, a staple of the business press, emphasizes the middle class consumer, whose demand for quality consumer goods feeds investment in production and marketing, which in turn raises income levels for everyone. This paper asks what should be made of these arguments in the context of today's developing countries. Banerjee and Duflo focus on two groups of middle class households: those whose daily per capita expenditures are between $2 and $4, and those with expenditures between $6 and $10. Starting from survey data on patterns of consumption and investment by the middle class in thirteen developing countries, the authors look for what is distinct about the global middle class, especially when compared to the global poor (defined as those whose per capita daily consumption is below $2 a day). In particular, is there anything special about the way middle class people per spend their money, earn their incomes, or bring up their children? LINK

Sources of TFP Growth – Occupational Choice and Financial Deepening

2007-09-01T05:00:00Z

In this in-depth look at theories of wealth creation, the authors develop a method of growth accounting based on the integrated use of transitional growth models and micro data to explain the sources of total factor productivity (TFP) growth. TFP growth is measured as a residual, so the authors seek to identify the underlying sources of this residual growth by decomposing growth into four components: occupational shifts, financial deepening, capital heterogeneity and sectoral Solow residuals. When the growth accounting method is utilized in Thailand, a country that experienced rapid growth and great structural changes between 1976 and 1996, it is found that the majority of TFP growth can be explained by occupational shifts and financial deepening. Additionally, expansion of credit is found to be a major part. LINK

Using Repayment Data to Test Across Models of Joint Liability Lending

2007-03-01T06:00:00Z

Theories rationalizing joint liability lending are rich in implications for repayment rates; this paper exploits this fact to test four diverse models. Ahlin and Townsend show that the models’ repayment implications do not always coincide. For example, higher correlation of output and borrowers’ ability to act cooperatively can raise or lower repayment, depending on the model. Data from Thai borrowing groups suggest that repayment is affected negatively by the joint liability rate (ceteris paribus) and social ties, and positively by the strength of local sanctions and correlated returns. Further, the relative fit of the adverse selection versus informal sanctions models varies by region. LINK

Selection Into and Across Credit Contracts: Theory and Field Research

2007-02-01T06:00:00Z

Lenders may choose to encourage borrower side contracting using group, or cosigned, loans or discourage it using individual loans, so as to make relative performance comparisons. In this context wealth of the agents relative to outsiders, and wealth inequality among potential joint liability partners, are important factors determining the choice among loan contracts. In a related model of whether to borrow, higher covariance of returns mitigates an adverse selection effect. This paper tests these models using relatively rich data gathered in field research in Thailand. The prevalence of joint liability contracts relative to individual contracts exhibits a U-shaped relationship with the wealth of the borrowing household and increases with the wealth dispersion. The likelihood of joint-liability borrowing increases the lower is the probability of project success, a direct affirmation of adverse selection. Higher correlation across projects makes joint liability borrowing more likely relative to all other alternatives. Strikingly, most of the results disappear if we do not condition the sample according to the dictates of the models, with selection into and across credit contracts. LINK