Does the insurance effect of public and private transfers favor financial deepening? Evidence from rural Nicaragua

The literature suggests CCTs and remittances may protect poor households from income risk. We present a theoretical framework that explores how this 'insurance' effect can change households' decision to apply for a loan via changes in credit demand and supply. Empirical evidence from...

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Bibliographic Details
Published inReview of development finance Vol. 2; no. 1; pp. 9 - 21
Main Authors Sam, Abdoul G., Hernandez, Emilio, Chen, Joyce J., Gonzalez-Vega, Claudio
Format Journal Article
LanguageEnglish
Published AfricaGrowth Institute 01.01.2012
Subjects
Conditional cash transfers
Credit markets
D14
F22
Migration
Nicaragua
O15
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Summary:The literature suggests CCTs and remittances may protect poor households from income risk. We present a theoretical framework that explores how this 'insurance' effect can change households' decision to apply for a loan via changes in credit demand and supply. Empirical evidence from poor rural households in Nicaragua shows CCTs did not affect loan requests while remittances increased them. The risk protection provided by remittances seems stronger, relative to CCTs, such that improvements on borrowers' expected marginal returns to a loan or on creditworthiness more than offset decreasing returns to additional income. This suggests those transfers that best protect households from income risk favor financial deepening in the context of segmented markets.
ISSN:1879-9337
1879-9337
DOI:10.1016/j.rdf.2012.01.005