The Impacts of Microcredit on Informal Risk Sharing : Experimental Evidence from China

This study examines the impacts of a large-scale government-led microcredit program on informal risk sharing among poor households in rural China based on a randomized controlled trial. The results show that financial inclusion, on average, reduced households’ borrowing from informal financial networks, and informal borrowing decreased substantially among households that were program members, regardless of whether they had borrowed from the program. Further analyses suggest that the program alleviated the dependence on informal financial networks to afford consumption shocks for program members who did not obtain program loans, and the crowding-out effect on informal borrowing existed even during the announcement period of the program for these households. These results are consistent with limited commitment models, which predict that access to microcredit raises the expected value of autarky utility relative to the utility derived from risk-pooling arrangements, and thus reduces the scope of implementable risk-sharing contracts