2020-2021 Seminar Series

There is considerable variation in the extent to which citizens around the world trust their governments to uphold private property rights. At one extreme are countries like Venezuela under the Chavez and Maduro regimes, where the government expropriated hundreds of private enterprises across industries. At the other end are countries like the United States and those of Western Europe, where governments have maintained the trust of their citizens in preserving and honoring institutions that protect private assets, investments and income. This paper analyzes how adverse shocks that align the interests of state and society shape a government’s ability to build the trust of its citizens. These shocks could arise from foreign threats, financial crises, and natural calamities. When shocks are frequent and severe, government can have the incentive to be trustworthy, since it requires cooperation from its citizens to avert these challenges. But if the shocks are not severe, increasing their frequency can reduce the scope for cooperation between state and society. In addition, we look at the case where the public cannot tell whether or not a shock has hit (the case of imperfect monitoring). In this case, the government’s challenge of building a reputation for being trustworthy is complicated by the fact that if it tries to raise revenue to avert a real crisis, citizens lose some trust in government as they suspect that it may have collected from them opportunistically. This happens despite the fact that the interests of state and society are aligned during these crises. We show here that the opportunity to build a reputation for trustworthiness can enhance the government’s payoff beyond what is achievable in the case where citizens know that the government is playing strategically.

Credit card debt is increasingly common among poor and inexperienced borrowers – thus de facto a financial inclusion product. However, it remains relatively under-studied. We use detailed card-level data and a product that accounted for 15% of all first-time formal loans in Mexico and show that default rates are high and ex-ante unpredictable for new borrowers – suggesting an important role for ex-post contract terms in limiting risk. However, using a large nation-wide experiment we find that default is unresponsive to minimum payment increases, a commonly proposed policy remedy. We provide evidence that the zero result is driven by the offsetting effects of tightened liquidity constraints and lower debt burdens. Surprisingly, we also find muted default responses to large experimental changes in interest rates – suggesting a limited role for ex-post moral hazard in our context. Finally, we use job displacements to document large effects of unemployment on default, highlighting the centrality of idiosyncratic shocks as a barrier to the expansion of formal credit among poorer populations.