Microcredit and Informal Risk Sharing: Experimental Evidence from the Village Banking Program in China

91 Pages Posted: 4 Jun 2021 Last revised: 27 Sep 2022

Date Written: April 20, 2021

Abstract

This study examines the impacts of a large-scale government-led microcredit program on informal risk sharing among poor households in rural China using a randomized controlled trial. The results show that access to microcredit reduced informal borrowing for an average household in treatment villages. In particular, informal borrowing decreased substantially for program members, regardless of whether or not they had borrowed from the program. Further analyses suggest that the program alleviated households’ dependence on informal borrowing to deal with consumption shocks for program members who did not borrow from the program. Meanwhile, for such households, the crowding-out effect on informal borrowing existed even during the program’s announcement period. These results are consistent with the theoretical prediction that access to microcredit raises the expected utility of autarky relative to that derived from risk-pooling arrangements, and thus reduces implementable risk-sharing contracts.

Keywords: financial inclusion, informal financing, risk-sharing network, limited commitment

JEL Classification: D14, D15, G21, O17, P34, Q12

Suggested Citation

Cai, Shu, Microcredit and Informal Risk Sharing: Experimental Evidence from the Village Banking Program in China (April 20, 2021). Available at SSRN: https://ssrn.com/abstract=3859868 or http://dx.doi.org/10.2139/ssrn.3859868

Shu Cai (Contact Author)

Jinan University ( email )

601 W. Huangpu Ave., Tianhe District
Guangzhou, Guangdong 510632
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
104
Abstract Views
405
Rank
382,512
PlumX Metrics