Shawn Cole
Assistant Professor of Finance
Harvard Business School
Baker Library 271
Soldiers Field
Boston, MA 02163
Tel: +1(617)495-6525
Fax: +1(617)495-7659
Email: scole@hbs.edu
Curriculum Vitae | Refereed Journal Articles | Other Publications | Manuscripts | HBS Cases
Research Abstracts
Refereed Journal Articles
Links for published papers reflect the most recent draft that was submitted for publication.
"Fixing Market Failures or Fixing Elections? Elections, Banks and Agricultural Lending in India" (Accepted, American Economic Journal: Applied Economics)
How vulnerable are financial institutions to political capture, how are captured resources used, and how costly are the resulting distortions? This paper answers these questions in the context of the credit market in India. Integrating theories of political budget cycles with theories of tactical electoral redistribution yields a compelling framework to test for the presence of capture. I find that government-owned banks are subject to substantial capture: the amount of agricultural credit lent by public banks is 5-10 percentage points higher in election years than in years following an election, and in election years more loans are made to districts in which the ruling state party had a narrow margin of victory (or a narrow loss) in the previous election. This targeting does not occur in non-election years. Politically motivated loans are costly: they are less likely to be repaid, and election year credit booms do not measurably affect agricultural output.
"Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?" (Accepted, Review of Economics and Statistics)
In 1980, India nationalized its large private banks. This induced different bank ownership patterns across different towns, allowing credible identification of the effects of bank ownership on financial development, lending rates, and the quality of intermediation, as well as employment and investment. Credit markets with nationalized banks experienced faster credit growth during a period of financial repression. Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services. Development lending goals were met, but these had no real impact. Finally, competition with private banks provided some discipline to nationalized banks.
"Remedying Education: Evidence from Two Randomized Experiments in India" (with A. Banerjee, E. Duflo, and L. Linden, Quarterly Journal of Economics, 2007, 122(3).)
This paper presents the results of two randomized experiments conducted in schools in urban India. A remedial education program hired young women to teach students lagging behind in basic literacy and numeracy skills. It increased average test scores of all children in treatment schools by 0.28 standard deviation, mostly due to large gains experienced by children at the bottom of the test-score distribution. A computer-assisted learning program focusing on math increased math scores by 0.47 standard deviation. One year after the programs were over, initial gains remained significant for targeted children, but they faded to about 0.10 standard deviation.
"Capitalism and Freedom: Slavery and Manumission in Louisiana, 1725-1820" (Journal of Economic History XX (2005) 65(4): 1008-1027.)
I use a rich new dataset of Louisiana slave records to answer long-standing questions about manumission. I examine who was manumitted, by whom, and whether manumittees paid prices above market for their freedom, shedding some light on the debate of the efficiency of slavery. Legal changes after the Louisiana Purchase allow us to conclude that manumission laws were quite important in determining the terms at which manumission agreements were struck: when slaves lost the right to sue for self-purchase at market price, there was a precipitous drop in the number of manumissions, while prices paid increased.
Review of “Building Inclusive Financial Systems: A Framework for Financial Access,” by Michael Barr, Anjali Kumar, and Robert Litan; and “Finance for All? Policies and Pitfalls in Expanding Access,” by Asli Demirguc-Kunt, Thorsten Beck, and Patrick Honohan. Journal of Economic Literature XLIV (Dec. 2008): 27-31.
"Where Does it Go? Spending by the Financially Constrained" (with J. Thompson and P. Tufano, forthcoming, in , Joint Center for Housing Studies and Brookings Press)
In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.
"Bank Financing in India" (with A. Banerjee and E. Duflo, 2005, in Tseng, W. and D. Cowen, eds., India's and China's Recent Experience with Reform and Growth, IMF and Palgrave-Macmillan.)
Building on previous work, this policy-oriented paper presents additional research on bank behavior in India. We consider direct costs to the government of public and private sector banks. Between 1969 and 2000, 21 private-sector banks in India failed, leaving the government liable to cover the depositors' loss. However, public banks also required capital infusions, and we calculate that the (size-adjusted) cost of maintaining public sector banks was higher than the cost of bailing out private banks. In 1980, the government nationalized six profitable private banks. We show that this nationalization reduced the growth rate of these banks. Finally, we discuss prospects for effective reform of the banking sector.
"Bank Reform in India" (with A. Banerjee and E. Duflo, 2004, India Policy Forum, Volume 1, Brookings Institution, p. 277-323.)
This policy-oriented piece presents research on lending behavior in India. We implement a new test for credit constraints, using data from a well-run government bank. A government policy change leads to a substantial increase in credit to a certain class of "priority sector" firms. This increase in credit leads to a dramatic increase in sales, and substantial increase in credit. Default rates do not increase. We therefore conclude that firms are credit constrained. We first demonstrate that loan officers are very conservative, following a rule-based system that awards credit based on sales, rather than profitability or future profitability. We present evidence in support of two reasons banks may decline profitable lending opportunities. Loan officers may fear penalties if loans go bad. Second, banks are inclined towards the "easy life," of lending to the government, particularly in areas where economic growth is slow.
"Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation" (joint with G.K. Shastry)
Household financial market participation affects asset prices and household welfare. Yet, our understanding of the participation decision is limited. Using an instrumental variables strategy and dataset new to this literature, we provide the first precise, causal estimates of the effects of education on financial maket participation. We find a large effect, even controlling for income. Examining mechanisms, we demonstrate that cognitive ability increases participation; however, and in contrast to previous research, financial literacy education does not affect decisions. We conclude by discussing how education may affect decision-making through: personality, borrowing behavior, discount rates, risk-aversion, and the influence of employers and neighbors.
"Are the Monitors Over-Monitored? Evidence from Corruption and Lending in Indian Banks" (joint with A. Banerjee and E. Duflo)
Most credit in India is provided by public-sector banks. Previous research has found that loan officers in public banks decline profitable lending opportunities, and are strikingly reluctant to enhance loans of growing and profitable firms. Loan officers in government owned banks often cite fear of prosecution for corruption as a reason for their rigid and conservative lending decisions. Using data from all commercial banks, from 1981 to 2003, we test this claim, using an event-study methodology to examine how lending decisions react to vigilance activity. We find evidence that vigilance activities result in reduced lending: the amount of credit declines sharply at the affected bank branch, as well as neighboring branches. This effect is economically and statistically significant, persisting up to two years. Bank risk-taking also declines following a vigilance event.
"Do Voters Appreciate Responsive Governments?Evidence from Indian disaster relief" (joint with A. Healy and E. Werker)
Using rainfall, public relief, and election data from India, we examine how governments respond to adverse shocks and how voters react to these responses. The data show that voters punish the incumbent party for weather events beyond its control. However, we find evidence that fewer voters punish the ruling party when the party responds vigorously to the crisis. Moreover, severe crises are associated with increased voter sensitivity to disaster assistance. These results are consistent with models of government accountability, and provide an explanation for Amartya Sen’s claim that democratic governments respond better to salient emergencies than to less conspicuous ones. Even so, the results suggest that even the most responsive government will fare worse in the subsequent election than had there been no disaster.
BASIX (Case 9-201-037, joint with Peter Tufano; Note 207-108, joint with Peter Tufano; and Teaching Note 5-208-017)
BASIX, an Indian microfinance corporation, must decide whether to continue to sell weather insurance to its clients. A brand-new financial product, weather insurance pays a payout if measured rainfall during the growing season falls below a pre-specified limit. Mr. Sattaiah, managing director of the BASIX's bank, considers a revised insurance policy for the coming season, weighing the costs and potential risks of expanding the product against the potential benefits.
First National Bank's Golden Opportunity (Case 9-208-072, joint with Peter Tufano, Daniel Schneider, and Daryl Collins)
First National Bank, based in South Africa, is considering whether to launch a potentially exciting, but rather unorthodox new savings product. Instead of interest, depositors earn entries in a lottery, held each month, which awards substantial cash prizes. Michael Jordaan, the CEO of Retail Banking Products, must decide whether the product will attract customers, and whether it will generate enough profit to cover substantial up-front investment costs. Further complicating the decision are the facts that the product's legality has not been established, and that, even if successful, might be easily copied.
SKS Microfinance (Case 9-208-137, joint with Theresa Chen)
Vikram Akula, CEO of SKS Microfinance, seeks a venture capital investment to fund his firm. SKS, one of the largest and fastest growing microfinance institutions in India, is a profitable, for profit institution with a social mission. In what is one of the first commercial financing deals in the world, Akula must decide at what value to sell equity in SKS, and to whom to sell it. The case focuses on valuation, which is difficult because at the time there are no publicly traded comparable companies, and the strategic aspects of raising money.
Work in Progress
“Weather Insurance: Managing Risk Through an Innovative Retail Derivative,” with P. Topalova (IMF) and J. Tobacman (Oxford)
“The Real Effects of Financial Development: How Do New Markets Affect Investment Decisions?” with S. Hunt (Harvard)
“Behavioral Biases or Rational Behavior: Understanding Demand for Transactions and Savings Accounts,” with T. Sampson (Harvard Economics Department) and B. Zia (World Bank)
“Incentives and Lending: Evidence from Microcredit Institutions,” with E. Farhi (Harvard Economics Department)