Abstract

In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nation-wide shock to the liquidity of lenders, especially those lenders with loans in the affected state. We use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, entrepreneurship, and employment in general equilibrium. Using a proprietary, hand-collected district-level data set from 27 separate, for-profit microlenders matched with household data from the National Sample Survey, we find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings and consumption. Moreover, we find significant heterogeneity by household landholdings, consistent with an equilibrium model in which medium-wealth households scale back their businesses and landless households are hit by a fall in the wage.