Essays on Development Economics: Consumers, Firms, and Financial Institutions

Abstract

This dissertation presents three chapters addressing issues pertaining to consumers, firms, and financial institutions in the developing world. The first chapter, co-authored with Juan Ma and Tarun Khanna, evaluates the effect of voluntary information disclosure in incentivizing firms to deliver high quality in the absence of regulation. We present evidence from two field experiments in China’s infant milk powder industry, which is undergoing a serious consumer trust crisis after several safety scandals. Contrary to common beliefs, our results suggest that providing certain positive quality-related information has a significantly negative impact on consumers’ purchase decisions and impression of the industry. We explain our findings via the existence of a “reminder effect,” where information disclosure triggers recall of and diverts attention to health and safety risks related to certain products. In the second chapter, I study the impact of firms’ industrial diversification on their innovation outcomes in China, which has recently been an important topic due to various government initiatives. By exploiting a policy launched by the Chinese government since 2011, I estimate the impact of related and unrelated diversification on corporate innovations measured by the number of patents received after 2012. Overall, I find opposite results for production-oriented and service-oriented firms, with related diversification more effective for the former and unrelated diversification more effective for the latter. One explanation, which is supported by subsequent analysis, is related to the different degrees of transferability of the technology and knowledge required for innovations. In the third chapter, I examine the complementarity of formal and informal finance represented respectively by banks and bidding ROSCAs (Rotating Savings and Credit Associations) in India, a critical source of credit for many impoverished individuals, households, and small businesses. Different from some traditional views, my results suggest that formal financial institutions can benefit the informal ones instead of replacing them. Using auction data from ROSCAs and operational data from banks in Andhra Pradesh, India from 1998 to 2000, I find that the emergence of formal finance, measured by nearby bank openings, increases ROSCA participation, reduces the cost of capital for ROSCA participants, and lowers the amount of ROSCA default.