Institutional Change in the Non-Market Economy: Endogenous Matching in Chennai's Chit Fund Auctions

54 Pages Posted: 22 Jan 2003

See all articles by Jan Eeckhout

Jan Eeckhout

University College London - Department of Economics

Kaivan D. Munshi

Brown University - Department of Economics

Date Written: December 2002

Abstract

This paper tests the proposition that non-market institutions can respond flexibly to changes in the economic environment that they operate in, using data from Chennai's chit fund auctions. These auctions bring borrowers and lenders together in small groups, and starting from September 1993, legal restrictions exogenously capped the amount that could be bid in the auctions. A theory of endogenous matching is proposed, in which borrowers and lenders sort themselves into groups with different characteristics, which also predicts how the participants will re-sort following the policy experiment. Data collected before and after the experiment reveals that this non-market institution settles remarkably quickly into its new equilibrium. Consistent with the theory, a completely different composition of borrowers and lenders in the groups, and a completely different group structure is observed.

Keywords: Roscas, Non-market Institutions, Endogenous Matching, Financial Intermediation

JEL Classification: O12, O17, G20, D40

Suggested Citation

Eeckhout, Jan and Munshi, Kaivan D., Institutional Change in the Non-Market Economy: Endogenous Matching in Chennai's Chit Fund Auctions (December 2002). MIT Department of Economics Working Paper No. 03-01. Available at SSRN: https://ssrn.com/abstract=372801 or http://dx.doi.org/10.2139/ssrn.372801

Jan Eeckhout

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom

Kaivan D. Munshi (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Box B
Providence, RI 02912
United States
401-863-9331 (Phone)
401-863-1970 (Fax)

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