
- 13 Nov 2020
- Working Paper Summaries
Long-Run Returns to Impact Investing in Emerging Markets and Developing Economies
Examination of every equity investment made by the International Finance Corporation, one of the largest and longest-operating impact investors, shows this portfolio has outperformed the S&P 500 by 15 percent.

- 05 Jun 2020
- Research & Ideas
How Anchor Investors Help Impact Funds Succeed
3Questions A startup fund's ability to attract a major first investor is a signal to others that the investment pool is just fine for entering. Shawn Cole and Rob Zochowski answer questions about anchor investors. Open for comment; 0 Comments.

- 04 Feb 2019
- Working Paper Summaries
Understanding and Overcoming Roadblocks to Environmental Sustainability. Past Roads and Future Prospects
At a summer 2018 Harvard Business School conference, historians, scholars, and business professionals debated barriers and opportunities for business and environmental sustainability. Although ideas of a future path differed, many participants said sustainability objectives based on voluntary firm action have become diffuse, making progress difficult.

- 03 Jan 2013
- Working Paper Summaries
The Value of Advice: Evidence from Mobile Phone-Based Agricultural Extension
This paper evaluates a new service that provides mobile-phone based agricultural consulting to poor farmers in India. For decades, the Government of India, like most governments in the developing world, has operated a system of agricultural extension, intended to spread information on new agricultural practices and technologies through a large work force of public extension agents. Evidence of the efficacy of these extension services, however, is limited. This paper describes a randomized field experiment examining the potential for an alternate route to improving agricultural management. Specifically, the authors evaluate Avaaj Otalo (AO), a mobile phone-based technology that allows farmers to call a hotline, ask questions, and receive responses from agricultural scientists and local extension workers. Findings show that AO had a range of important, positive effects on farmer behavior. This paper may be the first rigorous evaluation of mobile phone-based extension and, more generally, the first evaluation of a demand-driven extension service delivered by any means. Key concepts include: Farmers with access to the service were more likely to switch to a pesticide that is both more effective against pests, and dramatically less toxic to humans. Farmers receiving advice were also quicker to adopt high-value cash crops, planting more cumin and demonstrating more knowledge about it. The paper presents the first rigorous evidence that a low-cost agricultural extension service (costing as little as $.60 per farmer per month) can change behavior. There is a "digital divide" in India. There are systematic differences in adoption and use of the service, even among a relatively homogeneous group of farmers, and even for a technology that was specifically designed to be accessible to an illiterate population. Surveying by mobile phones can be conducted effectively and cheaply in a developing country context. There is considerable demand among farmers for high quality agricultural information. The information and communications technology (ICT) delivered timely, relevant, and actionable information and advice to farmers at dramatically lower cost than any traditional service. The ICT significantly changed farmers' sources of information for sowing and input-related decisions-in particular, farmers relied less on commissions-motivated agricultural input dealers for pesticide advice. Closed for comment; 0 Comments.

- 12 Sep 2012
- Working Paper Summaries
Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment
Microfinance has exploded in popularity and coverage in recent years, particularly in meeting the large unmet demand for finance. But what is the optimal loan contract structure? This paper examines the relative merits of joint and individual liability contracts by analyzing the effect of contract structure on a group of borrowers who are willing to borrow with either individual or group liability. Findings show that group liability structure significantly improves repayment rates. Overall, these results provide the first credible evidence that group liability contracts improve upon individual liability, particularly in ensuring repayment and increasing savings discipline among clients. Key concepts include: While most microfinance organizations use group liability, not all do so. The lending model matters. For the same borrower, required monthly loan installments are 11 percent less likely to be missed under the group liability setting, relative to individual liability. Compulsory savings deposits are 20 percent less likely to be missed under group liability contracts. Results suggest a cautionary tale: Many microfinance institutions have been moving away from joint to individual liability, but even so, this transition is not supported by strong empirical evidence. Closed for comment; 0 Comments.

- 30 Aug 2012
- Working Paper Summaries
Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers
Recent research presents convincing evidence that incentives rewarding loan origination may cause severe agency problems and increase credit risk, either by inducing lax screening standards or by tempting loan officers to game approval cutoffs even when such cutoffs are based on hard information. Yet to date there has been no evidence on whether performance-based compensation can remedy these problems. In this paper, the authors analyze the underwriting process of small-business loans in an emerging market, using a series of experiments with experienced loan officers from commercial banks. Comparing three commonly implemented classes of incentive schemes, they find a strong and economically significant impact of monetary incentives on screening effort, risk-assessment, and the profitability of originated loans. The experiments in this paper represent the first step of an ambitious agenda to fully understand the loan underwriting process. Key concepts include: High-powered incentives that penalize the origination of non-performing loans while rewarding profitable lending decisions cause loan officers to exert greater screening effort, approve fewer loans, and increase the profits per originated loan. In line with predictions, these effects are weakened when deferred compensation is introduced. More surprisingly, they find that incentives actually have the power to distort loan officers' perceptions of how a loan will perform. More permissive incentive schemes lead loan officers to rate loans as significantly less risky than the same loans evaluated under pay-for-performance. Closed for comment; 0 Comments.
- 13 Aug 2012
- Research & Ideas
When Good Incentives Lead to Bad Decisions
New research by Associate Professor Shawn A. Cole, Martin Kanz, and Leora Klapper explores how various compensation incentives affect lending decisions among bank loan officers. They find that incentives have the power to change not only how we make decisions, but how we perceive reality. Closed for comment; 0 Comments.

- 15 May 2009
- Working Paper Summaries
Barriers to Household Risk Management: Evidence from India
Insurance markets are growing rapidly in developing countries. Despite the promise of these markets, however, adoption to date has been relatively slow. Yet households often remain exposed to movements in local weather; regional house prices; prices of commodities like rice, heating oil, and gasoline; and local, regional, and national income fluctuations. In many cases, financial contracts simply do not exist to hedge these exposures, and when contracts do exist their use is not widespread. Why don't financial markets develop to help households hedge these risks? Why don't more households participate when formal markets are available? HBS professor Shawn Cole and coauthors attempt to shed light on these questions by studying participation in rural India in a rainfall risk-management product that provides a payoff based on monsoon rainfall. The results suggest that it may take a significant amount of time—and substantial marketing efforts—to increase adoption of risk-management tools at the household level. Key concepts include: To increase the insurance penetration rate of insurance products, it is important to minimize transaction and administrative costs and foster competition among insurance providers. Technological advances and contractual innovations may improve these products. The estimated significance of trust and vendor experience suggests that product diffusion through the population may be relatively slow until a track record is established. Optimal contract design could help by paying a positive return with sufficient frequency. "Catastrophe"-type insurance might be most beneficial for households, since it provides payouts that are concentrated in states of nature where the marginal utility of consumption is particularly high. Closed for comment; 0 Comments.

- 15 May 2009
- Working Paper Summaries
Money or Knowledge? What Drives Demand for Financial Services in Emerging Markets?
Why is there apparently limited demand for financial services in emerging markets? On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs. On the other hand, limited financial literacy could be the barrier: If people are not familiar or comfortable with products, they will not demand them. These two views carry significantly different implications for the development of financial markets around the world, and would suggest quite different policy decisions by governments and international organizations seeking to promote "financial deepening." HBS professor Shawn Cole and coauthors found that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although it does significantly increase the probability among those with low initial levels of financial literacy and low levels of education. In contrast, modest financial subsidies significantly increase the share of households that open a bank savings account within the subsequent two months. Key concepts include: Subsidies or price reductions may represent a more cost-effective way of drawing households into the financial system. Financial literacy efforts targeted at the general population may be relatively ineffective. These results do not necessarily constitute support for financial literacy education even among the low-literacy subpopulation. Even if financial literacy programs are carefully targeted, they may still not be cost-effective. Closed for comment; 0 Comments.

- 14 Jan 2009
- Working Paper Summaries
Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation
(Previously titled "If You Are So Smart, Why Aren't You Rich? The Effects of Education, Financial Literacy and Cognitive Ability on Financial Market Participation.") Individuals face an increasingly complex menu of financial product choices. The shift from defined benefit to defined contribution pension plans, and the growing importance of private retirement accounts, require individuals to choose the amount they save, as well as the mix of assets in which they invest. Yet, participation in financial markets is far from universal in the United States. Moreover, researchers have only a limited understanding of what factors cause participation. Cole and Shastry use a very large dataset new to the literature in order to study the important determinants of financial market participation. They find that higher levels of education and cognitive ability cause increased participation—however, financial literacy education does not. Key concepts include: The relationship between education and savings is difficult to measure, because both are affected by many factors (motivation, ability, etc.). This paper documents an important causal relationship between education and financial market participation. A set of financial literacy education programs, mandated by state governments, did not have an effect on individual savings decisions. It is imperative to conduct rigorous evaluations of financial literacy education programs to measure their efficacy. Closed for comment; 0 Comments.

- 30 Oct 2008
- Working Paper Summaries
Do Voters Appreciate Responsive Governments? Evidence from Indian Disaster Relief
In a functioning democracy, politicians' ability to win reelection declines when they perform poorly. This idea fits well with models of political accountability. Recent evidence suggests, however, that voters may punish politicians even for events outside their control. This behavior may violate standard models of democratic accountability, and has been advanced as evidence of voter irrationality. This paper uses detailed weather, electoral, and relief data to identify the relationship between government responsiveness to an emergency and electoral decisions. Specifically, the authors look at the decisions that Indian voters made in provincial elections, using the intensity of the monsoon rains as an exogenous shock to welfare. They find that voters, on average, punish incumbent politicians for being in office during weather events beyond their control. However, the degree of voter punishment is reduced somewhat when the government responds more vigorously to the crisis. Key concepts include: Voters do a better job of holding governments accountable during these emergencies. Voters punish politicians following adverse weather events, but the degree of punishment depends critically on the quality of the ruling party's response: Those distributing greater amounts of relief aid suffer smaller subsequent electoral losses. Closed for comment; 0 Comments.

- 06 Aug 2008
- Working Paper Summaries
Fixing Market Failures or Fixing Elections? Agricultural Credit in India
There are strong theoretical reasons to believe that politicians manipulate resources under their control to achieve electoral success. Yet, compelling examples of this manipulation are heretofore rarely documented in scholarly literature. Cole's paper presents evidence that government-owned banks in India serve the electoral interests of politicians. It also analyzes how resources are strategically distributed. Key concepts include: Findings show that the costs of redistribution are considerable: The estimated effect of 5 to 10 percent higher levels of credit in election years is substantially larger than the average annual growth rate of credit. Efforts to isolate government banks from political pressure, as is done with many central banks, may reduce these effects. Agricultural credit lent by public banks is substantially higher in election years. More loans are made in "swing" districts in which the ruling state party had a narrow margin of victory (or a narrow loss) than in less competitive districts. This targeting is not observed in nonelection years or in private bank lending. Closed for comment; 0 Comments.

- 22 Jul 2008
- Working Paper Summaries
Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?
Government ownership of banks, a common phenomenon, is among the most important policy tools used to influence financial development. But what is the actual effect of such ownership on the financial development of a country? This paper uses a policy experiment in India to evaluate the effect of government ownership of banks on development. Key concepts include: Had the Indian government required bank expansion into rural areas and set lending targets, without nationalizing banks, rural areas might have achieved the same, or better, outcomes. Despite a substantial increase in agricultural credit, there is no evidence of improved agricultural outcomes in markets with nationalized banks. Bank nationalization may have slowed the growth of employment in the more developed sectors of trade and services. Closed for comment; 0 Comments.

- 10 Apr 2008
- Working Paper Summaries
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.
ESG Activists Met the Moment at ExxonMobil, But Did They Succeed?
Engine No. 1, a small hedge fund on a mission to confront climate change, managed to do the impossible: Get dissident members on ExxonMobil's board. But lasting social impact has proved more elusive. Case studies by Mark Kramer, Shawn Cole, and Vikram Gandhi look at the complexities of shareholder activism.