Targeting Credit through Community Members

Abstract

Delegating the allocation of public resources to community members is an increasingly popular form of delivering development programs and are associated with a tradeoff between improved information about potential benef ciaries and favoritism towards local elites. Unlike targeting cash transfers to the poor, the optimal targeting of credit is a more complex problem involving issues of productivity, repayment, and market responses: This paper analyzes this problem using a large-scale lending program, the Thai Million Baht Credit Fund, which decentralizes the allocation of loans to an elected group of community members, and provides three main results. First, exploiting a long and detailed panel, I recover pre-program structural estimates of household total factor productivity and f nd that resources from the program were not allocated to high-productivity, poor households, which is inconsistent with poverty and productive eff ciency as targeting criteria. Second, using socioeconomic networks data, I show that actual targeting is strongly driven by connections to village elites and is related to lower program profitability, which suggests favoritism as a reason for mistargeting. Finally, I exploit quasi-experimental variation in the rollout of the program and uncover evidence that, in general equilibrium, informal credit markets compensate for targeting distortions by redirecting credit towards unconnected households, albeit at higher interest rates than those provided by the program. The results highlight the limitations of community-driven approaches to program delivery and the role of markets in attenuating potential targeting errors.

Decentralized Targeting of Agricultural Credit Programs: Private versus Political Intermediaries

“…Despite the promise that decentralization can improve targeting and implementation through better information and accountability, a growing literature argues that these programs have a mixed record. 1 Community-led programs are often captured by the local elite (see, for example World Development Report 2004; Mansuri and Rao 2013;Vera-Cossio 2018;Deserranno et al 2018), and there is evidence that local governments target their vote bank, rather than those who stand to benefit the most (Stokes 2005;Robinson and Verdier 2013; Bardhan et al 2015; Bardhan and Mookherjee 2016;Devarajan and Khemani 2016;Dey and Sen 2016).…”

Decentralized Targeting of Agricultural Credit Programs: Private versus Political Intermediaries

“…Despite the promise that decentralization can improve targeting and implementation through better information and accountability, a growing literature argues that these programs have a mixed record. 1 Community-led programs are often captured by the local elite (see, for example World Development Report 2004; Mansuri and Rao 2013;Vera-Cossio 2018;Deserranno et al 2018), and there is evidence that local governments target their vote bank, rather than those who stand to benefit the most (Stokes 2005;Robinson and Verdier 2013;Bardhan et al 2015; Bardhan and Mookherjee 2016;Devarajan and Khemani 2016;Dey and Sen 2016).…”