Larry W. Chavis

Decentralizing Development: Allocating Public Goods Via Competition

Decentralizing the allocation of public goods by giving funds directly to communities takes advantage of local information concerning needs, but leaves funds open to misuse or capture by local elites. A large scale development project in Indonesia attempts to overcome this downside of decentralized allocation by having communities compete locally for block grants. Competition weeds out less efficient projects. Increasing the number of villages bidding by 10% leads to a 1.8% decline in road construction costs. Increased community participation in project planning also leads to better outcomes.

A New Lease on Life: Institutions, External Financing, and Business Growth

This research utilizes data from the World Bank Investment Climate Survey to examine the use of external capital for almost 70,000 small and medium-sized firms in 103 developing and developed countries. Contrary to conventional wisdom, we find that most small firms in even the poorest countries have access to some type of external financing, however, the sources differ systematically by institutional and firm characteristics. For example, firms in poorer countries, with generally weaker institutions, use far less leasing for new investment and instead rely more on informal sources of capital such as money lenders and credit cards. We confirm that access to external capital is related to faster growth. Surprisingly, leasing is the only source of external finance related to growth in GDP and the manufacturing sector.

Access to Bank Financing and New Investment: Evidence from Europe

In this paper we study the relationship between firm age, the use of external finance and new investment decisions, in a sample of European firms. We find that younger firms use less bank financing than older firms only in non-EU countries, suggesting that greater financial development and a stronger investment climate offers young firms greater access to bank financing. Next, we show a link between a firm’s ability to obtain a loan and make new investments. Furthermore, we find that firms that report a need for credit, but did not apply for a loan, have the lowest incidence and amount of investment. Our results highlight the important role that the business environment can play in supporting wider access to external finance and greater private sector investment.