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

Emilio Hernandez-Hernandez (), Abdoul G. Sam, Claudio Gonzalez-Vega and Joyce Chen ()

MPRA Paper from University Library of Munich, Germany

Abstract: The literature suggests Conditional Cash Transfers (CCT) 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.

Keywords: Credit markets; migration, conditional cash transfers, Nicaragua (search for similar items in EconPapers)
JEL-codes: F22 O15 D14 (search for similar items in EconPapers)
Date: 2012-02-13
New Economics Papers: this item is included in nep-agr, nep-ias and nep-mfd
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