Essays in macroeconomics and microfinance

This dissertation contributes to studies in macroeconomics, microfinance, entrepreneurship, financial technology innovation (FinTech), and economic development. In particular, I study unbanked problems and evaluate microfinance programs.

The motivation of this thesis is the fact that 7.7% of households in the U.S. were unbanked (who have no bank accounts) in 2013 and that 20% of households were underbanked (who have a bank account but also use alternative financial services like payday loans) (FDIC). In addition, 25 million people have no credit score, which makes them invisible to the mainstream U.S. financial system (Forbes (2013)). Microfinance, which is a form of financial service for small businesses that lack access to traditional banking services, could be a potential solution for these issues.

Chapter 1 studies quantitatively how a microfinance program in the U.S. affects occupational choice, firm size, credit access, wages, output, inequality and welfare. The general equilibrium model has individuals that are different in initial wealth and managerial ability, a bank with a minimum loan size requirement, and a micro- finance institution (MFI) with a loan interest rate that exceeds the bank’s. Four microfinance program policies are evaluated: alternative minimum loan size requirements, changes in the loan cost wedge between loan interest rate and deposit interest rate (due to innovation or regulation), changes to the level of the government subsidy, and alternative MFI sustainability requirements. We find that MFIs can have significant welfare effects for some individuals.

Chapter 2 focuses on U.S. microsavings programs, especially programs directed at individuals who save to invest in small businesses. Microsavings is a branch of microfinance that is growing fast. Aggregate data on Individual Development Accounts is used to theoretically and quantitatively explore the effects of microsavings programs on occupational choice, firm size, and income inequality. This chapter introduces a microsavings program for low-wealth individuals in a general equilibrium model with individuals that are different in initial wealth and managerial ability. The model incorporates that (i) traditional banks require a minimum savings deposit size, causing some individuals to become unbanked, and (ii) banks and non-profits partner to offer microsavings programs to the unbanked. I find that microsavings programs increase the percentage of entrepreneurs by providing collateral that the previously unbanked can use to start firms, and increase wages which benefits workers. Second, government subsidies for microsavings programs expand the size and number of firms, but output and workers may decline when funding the program requires higher income taxes. Third, bank sector deregulation (i.e., lower transaction costs in the financial sector) leads to higher output per capita, wages, and firm numbers, as well as possibly lower income inequality among entrepreneurs. Finally, technological innovations that decrease deposit transaction costs, such as mobile banking, reduce funding pressure on microsavings programs, but have little effect on the percentage of entrepreneurs, firm size, entrepreneur returns or wages.