Jonathan Zinman

Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment

Information asymmetries are important in theory but difficult to identify in practice. We estimate the empirical importance of adverse selection and moral hazard in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers issued by a major South African lender along three dimensions: 1) the initial offer interest rate appearing on direct mail solicitations; 2) a contract interest rate equal to or less than the offer interest rate and revealed to the over 4,000 borrowers who agreed to the initial offer rate; and 3) a dynamic repayment incentive that extends preferential pricing on future loans to borrowers who remain in good standing. These three randomizations, combined with complete knowledge of the Lenders information set, permit identification of specific types of private information problems. Specifically, our setup distinguishes adverse selection from moral hazard effects on repayment, and thereby generates unique evidence on the existence and magnitudes of specific credit market failures. We find evidence of both adverse selection (among women) and moral hazard (predominantly among men), and the findings suggest that about 20% of default is due to asymmetric information problems. This helps explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers at very high rates.

Exponential Growth Bias and Household Finance

Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More-biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication. Copyright (c) 2009 the American Finance Association.

Getting to the Top of Mind: How Reminders Increase Saving

We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with other models of present-bias. Our model also generates the unique predictions that reminders will increase saving, and that a reminder that makes a specific expenditure more salient will be especially effective. We find support for these predictions in three field experiments that randomly assign reminders to new savings account holders.

Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila

Microcredit seeks to promote business growth and improve well-being by expanding access to credit. We use a field experiment and follow-up survey to measure impacts of a credit expansion for microentrepreneurs in Manila. The effects are diffuse, heterogeneous, and surprising. Although there is some evidence that profits increase, the mechanism seems to be that businesses shrink by shedding unproductive workers. Overall, borrowing households substitute away from labor (in both family and outside businesses), and into education. We also find substitution away from formal insurance, along with increases in access to informal risk-sharing mechanisms. Our treatment effects are stronger for groups that are not typically targeted by microlenders: male and higher-income entrepreneurs. In all, our results suggest that microcredit works broadly through risk management and investment at the household level, rather than directly through the targeted businesses.

Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation

A randomized controlled trial reveals both expected and surprising effects of microcredit. Microcredit institutions spend billions of dollars fighting poverty by making small loans primarily to female entrepreneurs. Proponents argue that microcredit mitigates market failures, spurs micro-enterprise growth, and boosts borrowers’ well-being. We tested these hypotheses with the use of an innovative, replicable experimental design that randomly assigned individual liability microloans (of

Being Surveyed Can Change Later Behavior and Related Parameter Estimates

225 on average) to 1601 individuals in the Philippines through credit scoring. After 11 to 22 months, we found evidence consistent with unmet demand at the current price (a roughly 60% annualized interest rate): Net borrowing increased in the treatment group relative to controls. However, the number of business activities and employees in the treatment group decreased relative to controls, and subjective well-being declined slightly. We also found little evidence that treatment effects were more pronounced for women. However, we did find that microloans increase ability to cope with risk, strengthen community ties, and increase access to informal credit. Thus, microcredit here may work, but through channels different from those often hypothesized by its proponents.

Redefine Statistical Significance

Does completing a household survey change the later behavior of those surveyed? In three field studies of health and two of microlending, we randomly assigned subjects to be surveyed about health and/or household finances and then measured subsequent use of a related product with data that does not rely on subjects self-reports. In the three health experiments, we find that being surveyed increases use of water treatment products and take-up of medical insurance. Frequent surveys on reported diarrhea also led to biased estimates of the impact of improved source water quality. In two microlending studies, we do not find an effect of being surveyed on borrowing behavior. The results suggest that limited attention could play an important but context-dependent role in consumer choice, with the implication that researchers should reconsider whether, how, and how much to survey their subjects.

Savings By and For the Poor: A Research Review and Agenda

We propose to change the default P-value threshold for statistical significance from 0.05 to 0.005 for claims of new discoveries.

Social and economic correlates of depressive symptoms and perceived stress in South African adults

The poor can and do save, but often use formal or informal instruments that have high risk, high cost, and limited functionality. This could lead to undersaving compared to a world without market or behavioral frictions. Undersaving can have important welfare consequences: variable consumption, low resilience to shocks, and foregone profitable investments. We lay out five sets of constraints that may hinder the adoption and effective usage of savings products and services by the poor: transaction costs, lack of trust and regulatory barriers, information and knowledge gaps, social constraints, and behavioral biases. We discuss each in theory, and then summarize related empirical evidence, with a focus on recent field experiments. We then put forward key open areas for research and practice. JEL Codes: D12, D91, G21, O16

In Harm's Way? Payday Loan Access and Military Personnel Performance

Objectives: Adults in South Africa demonstrate rates of mental illness at or above levels elsewhere in the developing world. Yet there is a research gap regarding the social context surrounding mental health in this region. The objective of this analysis was to characterize the prevalence and correlates of depressive symptoms and perceived stress among a heterogeneous South African population. Methods: Low-income adults (n u200a=u200a 257) in Capetown, Port Elizabeth and Durban were interviewed regarding demographics, income, subjective social status, life events and decision-making. The Center for Epidemiologic Studies Depression Scale (CES-D) and Cohen’s Perceived Stress Scale (PSS) were used. Results: CES-D scores were 18.8 (SD 11.7), with 50.4% of men and 64.5% of women exceeding the cut-off at which professional care is recommended (pu200a=u200a0.03). PSS scores were 18.6 (SD 6.7), with a mean of 17.5 among men and 19.6 among women (pu200a=u200a0.02). In multivariate regressions, increased CES-D scores were associated with more household members (p<0.1), lower educational attainment (pu200a=u200a0.07), less income stability (p<0.07), lower subjective social status (p<0.01) and independent decision-making (pu200a=u200a0.04). Increased PSS scores were associated with female gender (p<0.05), multiracial race (p<0.02), more household members (p<0.1), lower subjective social status (p<0.02) and recent birth or catastrophe (p<0.01). Conclusions: Depressive symptoms and perceived stress are public health concerns in this sample, with more symptoms among those with fewer resources. The prevention of mental illness is critical, especially in vulnerable populations.