Financial Inclusion and Contract Terms: Evidence from Mexico

• Departmental Seminar

Date and Location

Thursday, May 31, 2018, 12:10 PM - 1:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

We use detailed observational data and a large-scale countrywide experiment to study financial inclusion by examining a large bank's experience with a credit card that accounted for approximately $14\%$ of all first-time formal sector borrowing in Mexico in 2010. Borrowers have limited credit histories and high exit-risk -- a third of all study cards default or are cancelled during the 26 month sample period. However, much of this risk is unpredictable -- we implement machine-learning methods using bank information and document relatively low predictive power. We next use a large-scale randomized experiment on a representative sample of the bank's marginal borrowers to test whether contract terms affect behavior. We find that large experimental changes in interest rates and minimum payments do little to mitigate default risk. We also use detailed data on purchases and payments to construct measures of bank revenue per card and find they are generally low and variable, perhaps explaining why the bank reduced lending to such borrowers and eventually discontinued the product. Finally, we show that borrowers generating a favorable credit history are much more likely to switch banks providing suggestive evidence of a lending externality. Taken together these facts highlight the difficulty of expanding financial access using large formal sector financial organizations.