Giving Credit Where It Is Due

Abstract

In the last few years, field experiments have emerged as an attractive new tool in the effort to elaborate our understanding of economic issues relevant to poor countries and poor people. By enabling the researcher to precisely control the variation in the data, field experiments allow the estimation of parameters and testing of hypotheses that would be very difficult to implement with observational data. The results of this body of empirical work, in turn, have pushed theory in new directions. Much of this paper illustrates the power of this interplay between experimental and theoretical thinking. Rather than discussing this in the abstract, we focus on one area where the recent empirical work has been particularly exciting and useful—credit. Credit markets in developing countries offer up many facts and puzzles that lead us to build theories based on informational constraints and psychological limitations. The empirical work inspired by these theories, in turn, has generated both support for the theories, which then influenced policy thinking, and new puzzles, which have prompted new efforts to improve the theory. We see the substantive, two-way conversation taking place between theory and data around credit markets in developing economies as a promising template for the field.