Final Report Summary - RDHF (Risk and Development: Households and Firms) Risk and uncertainty are fundamental drivers of economic decision making, in particular for poor households and small firms. The vagaries of weather, health, demand, prices, etc. can determine extreme fluctuations in welfare and firm profits. While access to insurance and credit markets might alleviate the effects of such uncertainty.In this project, we study several aspects of such process and how households and firms deal with uncertain environments, and how their decisions depend on market access (formal or informal) as well as on institutional backgrounds.For example, we study how households insure against risk through networks of extended family members. The availability of such insurance device also fosters the investment in human and physical capital. In particular, investment in non-collateralizable assets, such as children’s education, is a function of the resources available to the household through its sharing network as formal credit markets would not be able to provide the necessary capital to that investment. In fact, we find that extended family networks provide both insurance against shocks and support for the investment in human capital of children. Such a connection is novel to the literature and quite relevant for policy design as investment in human capital, by poor households, has to potential to break the cycle of poverty across generations. Poor parents might face income shocks with the help of the labour supplied by their children whom would then have to discontinue their school attendance with a host of negative consequences. Agricultural households lacking other sources of insurance against the increase in the volatility of weather phenomena, and negative weather shocks, appear to take lower risk/lower return choices in terms of crop planting and cultivated land and often move away from agriculture to low return self-employment activities. While this behavior is potentially a successful income smoothing device, as any lower risk strategy, doesn’t allow specialization and therefore diminishes the profitability of the activity and limits the ability of the households to exit poverty in a permanent way. An immediate policy intervention here would call for the provision of insurance against income shocks. Alternatively, opening up credit markets through financial inclusion efforts proves to be a double edged sword, on the one hand it provides the ability to smooth temporary fluctuations in income, on the other hand it might lead to undesirable level of debt and extra delinquencies or excess consumption following ones’ reference networks as in a status model of consumption where keeping up with the Joneses’ is a rather crucial feature. Other government intervention bringing cash transfers to less than perfectly competitive markets on the supply side could also generate significant increase in local prices and therefore diminish the welfare of those that need the most help.In a similar fashion, small firms in developing countries are often unable to operate optimally as they lack fundamental knowledge of business practices, remain informal with little access to formal markets, or are subject to capture by local authorities. We show that business knowledge, provided by training female entrepreneurs in rural Mexico, increases these firms’ profits, number of clients served, and revenues. And these effects are substantial and don’t seem to disappear after a short period of time. At the same time many of the unsuccessful small entrepreneurs, in developing countries, seem to be entrepreneurs out of necessity rather than because of inclination and skills. These firms remain informal even when formalization process is rather streamlined and penalties for informality are increased. At the same time, we show how well-designed policies can curb corruption by local official by simply transferring some “incentive” power to firms.The main conclusions of this project can be summarized in 3 main parts:1. Households: Poor households in lower income countries face substantial risk and resolve into informal arrangements to insurance their consumption level and allow for investment in their children education. Social programs that address the lack of formal insurance, increase fair access to credit market, and favor investments in children’s education can tremendously improve welfare of these households and break the cycle of poverty that is transmitted across generations. However, these policies need to consider the potential negative effects of large cash transfers to locations where the supply chain is characterized by a lack of competition among providers as these transfers can result in price increases for those needs: so that the policy maker needs to strike a balance between cash and in-kind transfers depending on the underlying market structure of the specific location. Similarly, financial inclusion and access to credit policies need to be balanced and sustainable as for poorer households facing substantial risk there is a non-trivial risk of accumulation of debt and ultimately default.2. Firms: skills’ acquisition is extremely important for small entrepreneurs, certainly in poorer contexts. A proper design and implementation of business training programs can get extremely high returns on that investment, and in particular given the ability to scale the program delivery through adaptation of the business training to the specific business, market, and general context. In high informality and corruption areas we show that it is possible to curb corruption by changing the institutional set-up with a simple re-alignment of incentives between institutions and firms. Designing such schemes has the potential to curb corruption, while ameliorating both tax collection and firms’ profitability while cutting deadweight losses and increasing consumer welfare through lower final prices for a given good. At the same time, it proves extremely difficult to bring firms out of informality in high informality contexts either positive or negative incentive seem to only have a moderate effect on formalization.3. Target: aside from the academic relevance, the project is of high relevance to Policy Makers, International Organizations, and NGO’s at the local and global level for the design of effective policies to increase households’ welfare as well as firms’ profitability.Career Progression, Transfer of Knowledge, and Training:From the PI angle the CIG program has had a tremendous impact on his career progression and reintegration in Europe. During the course of the program I have built a pretty strong position in the profession: I have been a Research (full) Professor at ICREA/MOVE/BGSE/UAB a highly prestigious endowed position, and now a Full Professor as of 2016, and the Director of Institute of Economics and Econometrics at the GSEM-University of Geneva. I have been invited to join prestigious organizations such as the NBER, CEPR, BREAD, and IPA this is due to the quality of my research, teaching, transfer of knowledge as well as the training received and passed on. I have published extensively in international peer-reviewed journals during the project time frame, including in the most prestigious academic journals further to an established presence as for transfer of knowledge through easier access pieces. In this last aspect I have organized several international conferences, workshops, and public events: about a dozen since the beginning of the project. Similarly, I have given more than 100 invited talks at Universities and Organizations around the World. Importantly, the project has also resulted in collaborations with International Organizations such as the World Bank, IFC, IFPRI, Coneval, UNHCR where the knowledge generated by the project has been put into action and taken into account for the design of policy interventions. In terms of training I have tremendously benefitted from the collaborations within the host institutions as well as more in general with colleagues in several other Universities: this shows in the number of collaborations both with host institutions’ members as well as other academics worldwide.I believe that one of the most relevant way I transferred the knowledge generated is through my teaching (where I strive to transfer frontier research including my own), talks, seminars, and expert advice: over the past four years this has involved students at the BA, MSc and PhD level, academics, and policy makers from around the world (e.g. Tunisia, Jordan, Kyrgyzstan, Bangladesh, US, Mexico to cite a few Countries). I have advised extensively in this period both Organisations and students. In particular, in the past four years, I have been the advisor and committee member to 11 [*]PhD[/*] students and several Master and BA students.
