Limited information about borrowers can create allocative distortions in credit markets. In developing countries, community-based lending programs may reduce these distortions by exploiting information available to community members. However, decentralizing the allocation of loans entails balancing issues of risk, neediness, productivity, and favoritism. This paper analyzes this problem in the context of a publicly-funded lending program which decentralizes the allocation of loans to elected village committees and provides three main results. First, exploiting pre-program data to characterize the set of potential borrowers in terms of repayment, neediness and total factor productivity (TFP), this paper finds that neither of these dimensions explains program participation. Second, using socioeconomic networks data, this paper shows that actual targeting is strongly driven by connections with village leaders. This result is consistent with evidence of differences in information-transmission costs based on connections, but also with evidence of favoritism. Third, exploiting quasi-experimental variation in the program rollout, this paper shows that informal credit markets partially mitigate 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 delivering credit and the role of markets in attenuating allocative distortions.
Decreases in labor supply among cash-aid recipients are often cited as potential drawbacks of cash-transfer programs. In developing countries, such concern might be misplaced: This paper documents increases in labor supply due to a cash-transfer program. Using variation across cohorts and over time in the eligibility criteria of a nationwide conditional cash transfer program in Bolivian public schools, difference-in-differences estimates show that the probability of working increases by 4 percentage points in the case of adult females from households of eligible children. The results are unlikely to be explained by a relief of time constraints for adult females, as the results are driven by mothers whose children would have attended to school in absence of the program. Instead, this paper finds increases in self-employment and that the increases in labor supply are mostly driven by females from areas with limited access to financial services. The results suggest that cash transfer programs may relax liquidity constraints and may boost entrepreneurship among adult females.