Essays on debt recourse and financial inclusion

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The first study investigates the impact of different mortgage laws across states in the United States on consumers’ income elasticities of consumption. Specifically, I examine whether consumers residing in states with recourse mortgage laws demonstrate different income elasticities of consumption compared to those living in non-recourse states. Using a comprehensive household-level panel dataset, I find significant variations in income elasticities of consumption for non-durable goods among homeowners in recourse and non-recourse states. However, no significant difference is observed for non-homeowners which conforms to the hypothesis that mortgage law shouldn’t affect non-homeowners. Homeowners in recourse states exhibit 0.07 to 0.1 lower income elasticities of consumption for non-durable goods, indicating a relatively better ability to smooth their consumption patterns. I attribute this phenomenon to increased credit availability in recourse states, driven by reduced risk to lenders. Furthermore, the findings demonstrate that the impact of recourse is more pronounced among homeowners with lower credit scores, implying that recourse offers greater benefits to credit-constrained individuals. Thus, recourse appears to benefit the marginal consumer by enhancing credit accessibility, particularly in regions with lower credit scores. The second research paper examines the impact of a policy implemented in Bangladesh in 2011 aimed at enhancing financial accessibility for the rural population by increasing the number of rural branches of private banks. Under this policy, private banks were required to open an equal number of rural branches whenever they opened urban branches. Using a unique dataset and employing difference-in-difference and event-study methods, the study finds evidence of an increase in rural branches without adversely affecting the existing number of urban branches, suggesting a positive impact on total branch expansion. However, a robustness check using a different measure of pre-policy variation reveals no significant change in rural and total branch numbers, while urban branches exhibit a decline suggesting the possibility of an unintended consequence of policy which increased the cost of opening new urban branches.

Recourse, Consumption, Financial inclusion, Banking