Authors: Rajkamal Iyer and Antoinette Schoar
This paper explores the importance of culture in determining contractual outcomes. We set up a field experiment in India where we send shoppers from different communities to contract with wholesalers (who also belong to different communities) in the pen industry. We find that entrepreneurs from different communities vary in how they conduct business and negotiate contracts. Wholesalers from the Marwari community, who are considered the most entrepreneurial community in India, offer lower prices and smaller upfront payment than wholesalers from other communities. We also find that prices are lower when there is a community match between the shopper and wholesaler. But there is no difference on the level of upfront payment. Our results suggest that culture is an important factor in explaining differences in contract negotiations.

Authors: Rajkamal Iyer and Antoinette Schoar
This paper explores how the relationship specificity of an investment affects the ex-ante structure of contracts and the ex-post resolution of an ensuing hold-up problem. We set up a field experiment in the wholesale market for pens in India where we sent trained auditors as entrepreneurs to procure large orders of pens from wholesale dealers. We vary the specificity of the order by either buying generic or custom-printed lots of pens. We find clear support for the importance of incomplete contracting models. The greater threat of hold-up in the case of printed pens leads wholesalers to demand a significantly higher upfront payment compared to generic pens. Similarly, when faced with actual hold-up, wholesalers are more willing ex-post to renegotiate an order and accept lower prices in the case of printed pens. But while the signs of the contract terms corroborate the intuitions of incomplete contracting models, they do not explain the magnitudes we observe. First, the level of the upfront payment is so low that it is does not cover the procurement costs of the wholesaler. And second, we find that wholesalers often do not use their bargaining power even when a shopper holds them up ex-post. In fact we observe that in 60% of the generic deals they return the upfront payment when the shopper tries to hold them up. We also find that there is a lot of variation in the contract structure that is not explained by the relationship specificity of the investment.

Authors: Viral Acharya, Abhilasha Rajan, Antoinette Schoar
We investigated what determines entrepreneurial success by studying the characteristics of rural kiosk operators in India, specifically kiosks run by Drishtee. We constructed a questionnaire to collect data on various psychological factors from existing kiosk operators in two states: Assam and Uttar Pradesh (UP). We related these factors and questions to performance measured by log sales of the kiosk. A significant degree of performance variation can be explained by psychological characteristics, in particular, self efficacy, achievement motivation and average psychological aptitude for entrepreneurs in Assam. However, performance variation of UP’s entrepreneurs is explained by age and prior experience in borrowing in addition to the psychological characteristic of achievement motivation. We identify specific questions as well and find that performance is significantly related to the questions relating to self-efficacy and locus of control for both states. Finally, we employ these findings to build a model for the selection strategy of rural entrepreneurs.

Authors: Antoinette Schoar and Rohit Mukkawar
The aim of this research paper is to know how moneylenders are organized, how they do the business, and effects of changing legal environment on them. Instead of taking the already treaded path of interacting with borrowers to know about moneylenders, we directly interacted with moneylenders to get first hand information and a peek into their operational set up etc. This also helped us to know the moneylenders’ side of story and constraints they face instead of already known issues faced by borrowers. We used our personal contacts to get access to the moneylenders in small towns and also interacted with pawn brokers and other finance providers in metro city.

Authors: Antoinette Schaor, Raj Kamal Iyer, and Sandya Kumar
This paper explores the importance of ethnic networks in determining the outcome of business transactions in Small and Medium Enterprises sector. In a situation of hold up1 the degree of trust between the business parties will affect the willingness to enter into an agreement with each other. If a wholesaler gets a product customized and then the buyer does not come back to collect the delivery; the value of the products becomes less than the market price. In our study, auditors from different ethnicity purchase either a customized or non-customized product for delivery at a later date. Auditors were asked to adhere to a script and a predefined bargaining process. The analysis of the data shows that ethnicity plays a critical role in determining the fate of a business transaction. A match in the ethnicity of both the parties impacts the bargaining process and subsequently affects the contracted price. These results suggest that ethnicity of parties involved in a contract plays an important role in determination of the contractual features.

Authors: Preethi Rao
To understand more about the workings of chit funds and the difficulties that they face in their business, we interviewed a number of chit fund managers in Chennai, Tamil Nadu (India).These in-depth interviews gave us an idea about the possible research questions that may be addressed in this area.

Authors: Jessica Wade and Rock Magleby-Lambert
Providing rural finance can be a challenge for private banks, due to information asymmetries and the high cost of due diligence, low population density of the target clientele, and contract enforcement difficulties. However, the rural population presents a huge untapped market for banks in most developing countries. A recent rural finance innovation in India, the credit franchise or credit access point (CAP) initiative by ICICI Bank, offers many insights and lessons for other banks, policy makers, and academics exploring rural finance options. This paper describes the CAP model, discusses a randomized impact evaluation which aimed to test the model’s risk incentives, and analyses the experiment’s findings. The paper additionally compares this innovation to models in other countries, and offers suggestions for future bank-academic collaborations.

Authors: Jessica Wade

Authors: Preethi Rao and Sharon Buteau under the guidance of Professor Mudit Kapoor (ISB) and Professor Antoinette Schoar (MIT)
In order to understand the intricacies of the Chit Fund model in India, the Small Enterprise Finance Centre at the Institute for Financial Management and Research at Chennai, India, in collaboration with professors from Indian School of Business and Massachusetts Institute of Technology, studied the size of the registered Chit Fund industry, how it serves the members, what is the cost of funds and finally what is the size of its unregulated counterparts. In order to study the size of the industry, we collected data from the Office of the Registrar of Chits in five different states in India – Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Delhi – on the number and type of Chit Fund schemes registered over the years. To understand the profile of Chit Fund members and how they use the Chit Fund money, we surveyed a sample of around 400 Chit Fund members from each of the five states mentioned above. We collected data from different chit companies from the five states, on how members bid during monthly auctions over the years, to understand the average interest rate of Chit Fund loans. We interviewed managers and members of registered Chit Funds about their view of the unregistered Chit Fund industry to arrive at a guess-estimate of the size of the industry.

(To obtain a copy of the paper contact: 9840871442)