The Household Finance Landscape in Emerging Economies

We survey the household finance landscape in emerging economies. We first present statistics on household balance sheets from official micro-surveys in countries comprising 45% of the global population: China, India, Bangladesh, Philippines, Thailand, and South Africa. We contrast these patterns with those in data from advanced economies. We then survey the nascent literature on household finance in emerging economies and discuss areas of overlap with the more well-established literature on household finance in advanced economies, as well as the large body of literature on development finance. We highlight useful directions for future research.

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Learning from Noise: Evidence from India’s IPO Lotteries

Abstract:  We study a natural experiment in which 1.5 million investors participate in allocation lotteries for Indian IPO stocks between 2007 and 2012. Random gains on these stocks cause winning investors to increase applications to future IPOs, tilt portfolios towards the IPO’s industry sector, and substantially increase portfolio trading volume in non-IPO stocks relative to lottery losers. Effects are symmetrically negative for experienced losses, and decline monotonically with the number of past IPO allocations received. We consider a number of different models; the evidence is most consistent with investors learning about their own ability from experienced noise, drawing inferences about their skill from luck. These results suggest that economic agents learn about their own ability from noise shocks, though repeated exposure to these shocks and/or selection can significantly attenuate these responses.

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Endowment effects in the field: Evidence from India’s IPO Lotteries

Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This finding persists in samples of highly active investors, suggesting along with additional evidence that this “endowment effect” is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. These results provide field evidence derived from the behavior of 1.5 million Indian stock investors consistent with the laboratory literature that documents endowment effects for risky gambles.

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The Indian household finance landscape

Using the most recent wave of the AIDIS data, we describe and attempt to explain several important features of Indian household balance sheets. When compared with data on households in a range of developed and emerging economies, Indian households on average tend to hold a high fraction of non-financial assets with particularly high relative weights in real estate and gold, hold negligible retirement assets, and non-institutional debt is their primary source of debt. These propensities are also evident along the lifecycle, as well as at almost all points in the wealth distribution, and correlated with location (rural vs. urban), education, and family composition. Controlling for demographics, substantial state-level variation remains in asset and debt holdings which is related to state-level factors including historical inflation volatility, the share of the population in public sector employment, and the density of bank branch networks. We discuss the potential implications of these results for policy.

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