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Designing Shock Protection for Vulnerable Households: A Howto Guide


Saving (for a rainy day) Borrowing (on the rainy day) Insurance (its raining cash) ... Impacts how market, price, design products. Client Decision Making: Progress ... – PowerPoint PPT presentation

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Title: Designing Shock Protection for Vulnerable Households: A Howto Guide

Designing Shock Protection for Vulnerable
Households A How-to Guide
Jonathan Zinman Dartmouth College
BASIS CRSP Policy Conference Impact Evaluation of
Innovations in Rural Finance June 13, 2006
Overview of Talk
  • What are shocks?
  • Why should we focus on interventions to help
    smooth shocks?
  • What works? Dont know much, but on the right
  • Scientific standard the right one given stakes
  • Research adds value what works and why
  • What do we need to know? (The substance)
  • Are there underlying frictions in micromarkets?
  • How do our targeted consumers/entrepreneurs make
  • What works?
  • (Traditional evaluation approach answers only a
    small part of 4 at best)
  • How do we get there? The process
  • Experimentation and the learning organization
  • Real innovations guided by science and
    practitioner experience

Why Worry About Shocks?
  • Temporary setbacks should be smoothed
  • Long-run prospects unaffected
  • Smoothing getting households, businesses, back
    on their feet
  • Failure/inability to smooth is inefficient
  • Utility is concave in consumption a little
    consumption means a lot (of marginal utility)
  • Starving is very costly
  • Dont want viable businesses to fail
  • Irreversible investment problem high
    continuation value
  • Discourages risk-taking
  • Stock options example
  • Safety net for permanent shocks

How Do People/Firms Deal With Shocks?
  • Saving (for a rainy day)
  • Borrowing (on the rainy day)
  • Insurance (its raining cash)

Why Should We Worry About Shocks?
  • Some reason (arguably ample reason) to believe
    that microfinance and microinsurance markets
    dont function well
  • Information asymmetries
  • Consumer biases
  • Undersaving…. Underinsuring?
  • Overborrowing on sunny days
  • Inadequate safety net
  • Especially in LDCs
  • Incomplete formal markets perverse
    consequences? (crowd-out informal)
  • Theory also shows that when markets are missing,
    shocks can have disastrous consequences
  • Poverty traps
  • Debt traps

Why Should We Worry About Shocks?
  • Much more theory, practice than conclusive
    evidence here
  • Evidence is somewhat indirect when shocks
    happen, how well can households smooth/recover?
  • Shocks are a problem Gertler and Gruber AER 2002
    Gertler et al 2004
  • Shocks not a big problem (informal
    markets/networks do the job) Townsend 1995,
  • Morduch 2002 (World Bank Observer) reviews

Can Micromarket Interventions Help?
  • The little available evidence suggests yes
  • Gertler et al microcredit and health shocks
  • Ongoing BASIS-funded research, including….
  • Karlan-Zinman 2006
  • more consumer credit access
  • avoid shocks, smoother consumption

What works?
  • More research needed….
  • Scientific standard appropriate given level of
    resources committed to development projects
  • Randomized-control trials gold standard
  • Research adds value, saves donor money in
  • What works….
  • Work relative to what? (opportunity cost)
  • Replicate effective interventions
  • Why (doesnt) work?
  • Guide next round of innovations

So What Do We Need to Know? The Three Questions
  • Are there market frictions?
  • How do targeted folks make decisions?
  • What works?
  • s 1-2 about whether and how to design
    interventions that works
  • the R in RD
  • 3 about what works
  • Evaluation as traditionally defined

So What Do We Need to Know?
  • Are there market frictions?
  • Important because tells use whether and how to
  • Example asymmetric information
  • Biggest motivation for microfin/insurance
  • But little empirical evidence
  • Moral hazard and adverse selection have different
    practical and policy implications
  • E.g., invest in enforcement? Screening?

Asymmetric Information Progress
  • Karlan-Zinman 2005 randomize offered/actual/and
    future rate in a consumer credit market (Manfred)
  • Gine-Karlan-Zinman 2006 randomize premiums
    offered on private hospitalization insurance
  • Karlan-Mullainathan-Zinman randomize enforcement

So What Do We Need to Know?
  • 2. How do targeted folks make decisions?
  • If we build it, will they come?
  • What should we build in the first place?
  • Example are people rational or
  • Impacts how market, price, design products

Client Decision Making Progress
  • Example Say you want to help people save (or
    access credit or insurance) to help protect
    against shocks….
  • Only psych agents want commitment devices
    (Omar SEED also anti-smoking)
  • Only psych agents may respond more to
    marketing/presentation than to price (BKMSZ, with
  • Rational will benefit from expanded access to
    consumer credit, psych may not (Manfred)

Smoothing and Targeting
  • Thinking about specific motivations for
    intervention (Questions 1-2) raises another key
  • Whom should we target?
  • Why has consumer credit been the bastard
    stepchild of microcredit?

Why not Target Consumers?
  • Pat answer consumer credit not productive
  • But theory and (a bit of) evidence suggest that
    benefits from smoothing are large, and that
    micromarkets could help
  • Evidence shows that entrepreneurial credit used
    for consn smoothing (Menon) and vice versa
    (Karlan-Zinman credit cards in the U.S.)

Why Not Target Consumers?
  • Pat answer consumers dont know whats good for
    them. Biases lead to overborrowing (BKMSZ
  • But consumer the business in closely-held
  • Do people wear different hats?
  • Are entrepreneurs more rational than their
    wage-earning counterparts?

Question 3. What Works?
  • What is what?....
  • Product design, market access has many
  • Pricing
  • Other contract terms (e.g., loan maturity)
  • Risk assessment
  • Enforcement
  • Product development
  • Product presentation (marketing and sales)
  • Targeting

What Works? Beyond Evaluation Experimentation
  • What helps consumers deal with shocks?
  • All of our related projects answer this question
  • We test specific interventions/innovations. More
  • Does access to health insurance improve
    well-being? (ongoing)
  • Expanding consumer credit supply DOES improve
    well-being (Manfred)
  • Does expanding access to microcredit via credit
    scoring improve household well-being? (Reggie)
  • But approach is more ambitious than traditional

What Works? Beyond Evaluation Experimentation
  • Traditional evaluation
  • After-the-fact
  • Often ad-hoc
  • Experimentation
  • Ground-floor and continuous
  • architecture vs. inspection approach
  • Build in tests of the why questions as well
  • Feed back into design and operations
  • Experiment again

Experimentation the Learning Organization A
Virtuous Cycle
Experimentation as Process Innovation
  • Experimentation does more than answer the 3
  • Can transform organizations
  • Mircomarkets democratize finance
  • Experiments democratize scientific approach to
    business, policy

Experiments are Process Innovation The Learning
  • Experiments make organizations more
  • Strategic
  • Systematic
  • Scientific
  • Capable
  • Examples Green Bank ICICI Other credit card
    companies HR Block Amazon)
  • Experimental approach also makes knowledge
    transfer easier methodology and assumptions are

Summing Up
  • Research adds value
  • What works and why
  • Helps with evaluation and design
  • What we need to do
  • Answer the 3 questions
  • Frictions/failures?
  • Decision Making by our targets?
  • What works?

Summing Up
  • How we do it process innovation
  • Learn by doing
  • Learn from doing
  • The learning organization….

Experimentation the Learning Organization A
Virtuous Cycle