A STRUCTURAL EVALUATION OF A LARGE-SCALE QUASI-EXPERIMENTAL MICROFINANCE INITIATIVE

BY JOSEPH P. KABOSKI AND ROBERT M. TOWNSEND

This paper uses a structural model to understand, predict, and evaluate the impact
of an exogenous microcredit intervention program, the Thai Million Baht Village Fund
program. We model household decisions in the face of borrowing constraints, income
uncertainty, and high-yield indivisible investment opportunities. After estimation of
parameters using preprogram data, we evaluate the model’s ability to predict and interpret
the impact of the village fund intervention. Simulations from the model mirror
the data in yielding a greater increase in consumption than credit, which is interpreted
as evidence of credit constraints. A cost–benefit analysis using the model indicates that
some households value the program much more than its per household cost, but overall
the program costs 30 percent more than the sum of these benefits.



ON THE SIZE DISTRIBUTION OF MACROECONOMIC DISASTERS

BY ROBERT J. BARRO AND TAO JIN

The coefficient of relative risk aversion is a key parameter for analyses of behavior
toward risk, but good estimates of this parameter do not exist. A promising place for
reliable estimation is rare macroeconomic disasters, which have a major influence on
the equity premium. The premium depends on the probability and size distribution of
disasters, gauged by proportionate declines in per capita consumption or gross domestic
product. Long-term national-accounts data for 36 countries provide a large sample
of disasters of magnitude 10% or more. A power-law density provides a good fit to the
size distribution, and the upper-tail exponent, α, is estimated to be around 4. A higher
α signifies a thinner tail and, therefore, a lower equity premium, whereas a higher coefficient
of relative risk aversion, γ, implies a higher premium. The premium is finite if
α > γ. The observed premium of 5% generates an estimated γ close to 3, with a 95%
confidence interval of 2 to 4. The results are robust to uncertainty about the values
of the disaster probability and the equity premium, and can accommodate seemingly
paradoxical situations in which the equity premium may appear to be infinite.