Shawn Cole

Marketing Complex Financial Products in Emerging Markets: Evidence from Rainfall Insurance in India

Recent financial liberalization in emerging economies has led to the rapid introduction of new financial products. Lack of experience with financial products, low levels of education, and low financial literacy may slow adoption of these products. This article reports on a field experiment that offered an innovative new financial product, rainfall insurance, to 600 small-scale farmers in India. A customized financial literacy and insurance education module communicating the need for personal financial management and the usefulness of formal hedging of agricultural production risks was offered to randomly selected farmers in Gujarat, India. The authors evaluate the effect of the financial literacy training and three marketing treatments using a randomized controlled trial. Financial education has a positive and significant effect on rainfall insurance adoption, increasing take-up from 8% to 16%. Only one marketing intervention, the money-back guarantee, has a consistent and large effect on farmers’ purchase decisions. This guarantee, comparable to a price reduction of approximately 40%, increases demand by seven percentage points.

Unpacking the Causal Chain of Financial Literacy

A growing body of literature examines the causal impact of financial literacy on individual, household, and firm level outcomes. This paper unpacks the mechanism of impact by focusing on the first link in the causal chain. Specifically, it studies the experimental impact of financial literacy on three distinct dimensions of financial knowledge. The analysis finds that financial literacy does not immediately enable individuals to discern costs and rewards that require high numeracy skills, but it does significantly improve basic awareness of financial choices and attitudes toward financial decisions. Monetary incentives do not induce better performance, suggesting cognitive constraints rather than lack of attention are a key barrier to improving financial knowledge. These results illuminate the strengths and limitations of financial literacy training, which can inform the design and anticipated effects of such programs.

Incentivizing calculated risk-taking :evidence from an experiment with commercial bank loan officers

This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. The paper first shows that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by loan officers. Second, the paper presents direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.

How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment

Weather is a key source of income risk, particularly in emerging market economies. This paper uses a randomized controlled trial involving a sample of Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers — particularly educated farmers — to shift production toward higher-return but higher-risk cash crops. Our results support the view that financial innovation can mitigate the real effects of uninsured production risk. Addressing the puzzle of low adoption, we show that payouts improve trust in the product and that farmers shield payouts from claims by relatives.

Bank Financing in India

The Indian banking sector has been remarkably successful in some respects. Its immense size and enormous penetration in rural areas are exemplary among developing countries, as is its solid reputation for stability among depositors. The penetration in rural areas has been associated with a reduction of poverty and a diversification out of agriculture.2 However, in recent years, it has been widely viewed as being both expensive and inept. In particular, it has been argued that most banks are overstaffed, that a large fraction of their assets are nonperforming, and that they under lend, in the sense of not putting enough effort into their primary task of financing industry.3 A wide range of remedies have been suggested ranging from strengthening the legal system to punish defaulters, to abolishing the targeted lending programs (so-called priority sector rules), to privatization of the entire banking system.

Smart Money: The Effect of Education on Financial Behavior

Household financial decisions are important for both households and the greater economy. Yet, our understanding of the process of financial decision-making is limited. Applying standard and two-sample instrumental variables strategies to census and credit bureau data, we provide the first precise, causal estimates of the effects of education on financial behavior. Education has large effects on financial market participation and smaller, but statistically and economically significant effects on financial management. We find that education improves credit scores, and dramatically reduces the probability of declaring bankruptcy or suffering foreclosure during the financial crisis. Examining mechanisms, we show that cognitive ability increases financial participation, and discuss how education may affect decision-making through: attitudes, borrowing behavior, discount rates, risk-aversion, and the influence of coworkers and neighbors.

High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses

Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful. Using plausibly exogenous variation in exposure to state-mandated personal finance and mathematics high school courses, affecting millions of students, this paper answers the question “Can high school graduation requirements impact financial outcomes?” The answer is yes, although not via traditional personal finance courses, which we find have no effect on financial outcomes. Instead, we find additional mathematics training leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.

Capitalism and Freedom: Manumissions and the Slave Market in Louisiana, 1725–1820

I use a rich new dataset of Louisiana slave records to answer long-standing questions about manumission. I examine who was manumitted, by whom, and whether manumittees paid prices above market for their freedom, shedding some light on the debate of the efficiency of slavery. Legal changes after the Louisiana Purchase allow us to conclude that manumission laws were quite important in determining the terms at which manumission agreements were struck: when slaves lost the right to sue for self-purchase at market price, there was a precipitous drop in the number of manumissions, while prices paid increased.

Where does it go? Spending by the financially constrained.

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

‘Mobile’izing Agricultural Advice: Technology Adoption, Diffusion and Sustainability

Attempts to explain the astonishing differences in agricultural productivity around the world typically focus on farm size, farmer risk aversion, and credit constraints, with an emphasis on how they might serve to limit technology adoption. This paper takes a different tack: can managerial practices explain this variation in productivity? A randomized evaluation of the introduction of a mobile-phone based agricultural consulting service, “Avaaj Otalo (AO)” to cotton farmers in Gujarat, India, reveals the following. Demand for agricultural advice is high, with more than half of farmers calling AO in the first seven months. Farmers offered the service turn less often to other farmers and input sellers for agricultural advice. Management practices change as well: we observe an increase in the adoption of more effective pesticides, and reduced expenditure on less effective and hazardous pesticides. Treated farmers also sow a significantly larger quantity of cumin, a lucrative but risky crop. Interestingly, use of the service is increasing in the level of farmer education, but education levels do not affect the size of treatment effects. Farmers appear willing to follow advice without understanding why the advice is correct: the average respondent does not demonstrate improved agricultural knowledge, though there is some evidence educated farmers learn from the service.Attempts to explain dramatic differences in agricultural productivity around the world typically focus on farm size, risk aversion, and credit constraints, with an emphasis on how they might serve to limit technology adoption. This paper takes a different tack: can managerial practices explain this variation in productivity? A randomized evaluation of a mobile phone-based agricultural consulting service, Avaaj Otalo (AO), to farmers in Gujarat, India, reveals the following. Demand for agricultural advice is substantial and farmers offered the service turn less often to traditional sources of agricultural advice. Management practices change as well: farmers invest more in recommended agricultural inputs, resulting in dramatic increases in average yield for cumin (28.0%), as well as improvements in cotton yield (8.6%) for a sub-group that received frequent reminders to use the service. Our design allows us to estimate peer effects, and we find treated farmers with more treated peers are more likely to change their cropping decisions and successfully address pest shocks. The value of the latter externality is more than twice the cost of the subsidy that would be necessary to operate the service. We estimate that each dollar spent on providing the service yields a private return of