“Lending to the Unbanked: A New Database and New Insights”
Alternative Financial Services (AFS) refer to a wide range of financial products and services that are offered outside of traditional banking systems: payday, pawnshop, title and peer-to-peer (P2P) loans, non-bank check cashing, refund anticipation loans (RALs), and rent-to-own (RTO) stores. AFS is a sizable industry used by 25% of Americans and 50% of those making less than $30K/year. It serves the “unbanked” or “underbanked” who live paycheck-to-paycheck and do not have a checking, savings, or any other type of bank account. AFS borrowers are usually returning or repeat borrowers, which creates dangerous and costly debt traps for them. All these products entail high costs, inherent to the default risk of lending to the poor. To date, existing databases on AFS (mostly surveys) concentrate on the “who” and the “why” of AFS, namely, describing what are the demographic characteristics of people who typically borrow from alternative lenders, and why they do so even when the cost is so high. We know quite a bit about the access and usage of AFS, but very little about the lending conditions, i.e. the “how?” of AFS. Our first goal with AFS-New Data is to start bridging this gap by building a dataset on these conditions (interest rates, fees and other costs, loan-to-value and debt-to-income ratios) and to link them to demographic information on borrowers and their zip code of residence. Our second goal is to provide regulators and policy makers with a toolkit that allows for better enforcement of laws around anti-predatory and anti-discriminatory lending. This project involves a large team of undergraduate RAs, to train and encourage them to become the next generation of academics and leaders in policy.
“Banking Networks, Credit Concentration and the Transmission of Sector-Specific Shocks" (with Pablo D'Erasmo and Hernan Moscoso Boedo)
“Labor Market Informality, Financial Development and Income Distribution”
We study how heterogeneities in firms’ productivity allow these firms to endogenously “select” into the informal or formal sectors of the economy. These sectors differ from each other along two dimensions: (1) the degree of access to credit markets, and (2) the type of frictions in labor markets that give rise to unemployment. We develop a theoretical model that allows us to study the implications of financial liberalization on firms’ access to the formal sector, consumers access to credit markets and the resulting impact on inequality and income distribution.
“Competition, Markups and the Gains from International Trade”
We take the international trade model with endogenous markups of Edmond, Midrigan and Xu (2015) and extend it to account for “deep habits” a la Ravn et al (2006) in the demand for both domestic and foreign intermediates by the producers of final goods. EMX (2015) find that trade can significantly reduce markup distortions only under two conditions: that there must be large inefficiencies associated with markups, i.e., extensive misallocation, and that trade must expose producers to greater competitive pressure. We study if “deep habits” (or for what matters any other friction that generates markups that are endogenously related to the volume of trade and not just the shares), might make the pro-competitive gains from trade more likely to be positive. If so, a weak pattern of comparative advantage in individual sectors might not be such a strong requirement for large gains from trade.
“Credit Misallocation around a Big Shock: Evidence from Argentina”
We study the real effects of distortions associated to misallocation in credit markets in the economy of Argentina. The period we study covers the sovereign default declared in December of 2001 on $95 billion worth of sovereign debt (37% of GDP), the largest sovereign default in world history, as well as the subsequent sharp currency devaluation that followed in January of 2002. By the end of that year, the peso had already depreciated by almost 250% and interest rates had risen dramatically. Since most of the debt was denominated in foreign currency, the debt-to-GDP ratio jumped to 150%. Just one year after the default GDP had dropped by a cumulative 15% relative to the beginning of 1998, annual inflation reached 40%, unemployment 25% of the labor force, and poverty 50% of the population. Given the magnitude of this default we interpret it as an unanticipated shock to credit markets.
Apart from the stark magnitude of this aggregate shock, it is also important to highlight that the devaluation entailed a big change in relative prices and the relative competitiveness of different sectors as a function mostly of their exposure to international trade. Exporters saw a drastic increase in their ability to access foreign markets, while importers were hurt with a drastic increase in their operating costs. Non-tradeable sectors were hurt by a collapse of aggregate demand in the domestic market. Turning specifically to developments in financial markets, it is natural to think that the access to credit markets of these heterogeneous sectors must have changed noticeably when productivity and the value of their cash flows and collateral changed as a result of these sudden changes to relative prices. After all, it is reasonable to conjecture that lenders must have reallocated credit supply towards the sectors that benefited from the peso devaluation and away from the sectors that were negatively impacted.