SZE YU – APRIL 28TH, 2021

Professor Visaria is an Associate Professor of Economics at the Hong Kong University of Science and Technology. Her research focuses on development economics and applied microeconomics.

Sze Yu: I’d like to begin by speaking about your personal journey in economics. What was it that initially drew you to economics, and what experiences influenced this interest?

Prof. Visaria: Well to start with, I’m Indian, so I come from a developing country. I guess you could say growing up there was like an immersion experience. As a result, I have always been interested in the problems of low-income people. Having lived in a place where there is so much poverty, it becomes very clear that different people have different opportunities. 

It is very difficult to overcome initial underprivilege in Indiabeing born in a low-income uneducated household sets up barriers for you all along the way. The Indian system is not one that provides very good primary schooling, for example. The public education and public health systems are clearly inadequate. Growing up, it was very much in my face that a lot of what I had was simply luck of the draw from being born in a higher-income household. 

There was a time when I toyed with studying medicine because I thought it could be something that was meaningful and fulfilling, but the fact that my parents were social scientists definitely had an important influence. They were both researchers and they co-wrote various papers and books, so as a child, I overheard a lot of conversation about economic development. When I was about to graduate high school, my father gave me Paul Samuelson’s textbook to read, and it fascinated me. I found the way of thinking so interesting, and when I entered university, economics just seemed like the logical subject to pick. I think I made a good choice!

Sze Yu: How did you come to the conclusion that academia was the best way to address these issues of poverty and inequality?

Prof. Visaria: That’s a very good question. I’m never convinced that it’s the best way to do it, and I’m still not convinced! (laughs) But I guess the question is, if not this then what? The other thing I did consider was medicine, which is very clear and straightforward. If you are a doctor, there’s very little ambiguity around whether you helped someone or not. 

The other thing I considered was working in an NGO where I could carry out development programmes and help actively make a difference to someone’s life. In academia, the work I do often has an extremely indirect effect on people’s lives, if any effect at all. On the other hand, I feel that while academia is much more intellectually demanding, it is also therefore much more intellectually fulfilling in a way that I worry it might not be if I was working in an NGO.

Sze Yu: Could you tell me about some research projects you are working on now, and how you are collecting your data? 

Prof. Visaria: I have a few different research projects that I can talk about. One project that we have already collected the data for has to do with vote-buying. Vote-buying is something that happens in many developing countries where politicians who want to get elected offer the voters what you might call a bribe. Obviously this is illegal, but it is not easy to prove.

This project started off with us trying to find out how much vote-buying there was in a particular election in Central India. Although we had to adapt our data collection strategy, which didn’t work as well in the field as we expected, we ultimately were able to obtain measures across 250 villages of whether people thought there was vote-buying in their village, and whether people themselves were made an offer. 

The great promise of democracy is supposed to be that people can influence policy and influence what services and benefits they receive. And yet, in a country like mine, you still see so much underdevelopment in health, education, and so on. Something that has always interested me is, what is it that allows the same politicians to keep coming back into power, even while these essential services are not being delivered?

There are several things that politicians do. One is clientelism, where they trade off private benefits for public goods. The other is bribing. We don’t know how these tools are used, in what circumstances politicians use one instead of the other, or even how effective these tools are. In the case of vote-buying, people are being given a couple hundred rupees a few days before the election to vote someone in for the next five years! Can’t people just take the money and vote for whoever they wanted to vote for in the first place? These are some of the questions that we are trying to find out.

Sze Yu: You are also involved in some research projects looking at the borrowing behaviour of domestic workers. Could you tell me more about that?

Prof. Visaria: Of course. Something that I am working on that is still in the planning phase has to do with Filipina domestic workers here in Hong Kong. I have done some research where I looked at their financial choices, and what intrigued me was that a lot of them seem to borrow very heavily and save very little.

This is a bit of a puzzle because they have regular income every month, so there’s not a lot of ambiguity about how much they expect to make. Of course there are fluctuations in remittances being sent back home, but most life expenses are pretty standard. It should be possible to plan and to save every month. Instead, what I found in the data is that when they have investments they want to make, Filipina domestic workers tend to finance that through a loan which they are then forced to pay interest on. It would be cheaper to save instead and avoid the stress of having to pay back the loan. What explains this behaviour? That’s where I started with this project.

I have a hypothesis that argues for something called a kin-tax. If the domestic workers have disposable income that they intended to save, but their kinship network knows that they have this money, it becomes very hard to save successfully as their family members and relatives will make a demand for that money. With a loan, however, there is the money-lender who has to be repaid. This provides the discipline that allows these domestic workers to set aside money which they otherwise would end up having to share with others. 

There are also researchers in other contexts, many in Africa, who argue that kin-taxes are very important in shaping people’s financial decisions. I wanted to show that kin-taxes were important and that kin-taxes are the reason why Filipina domestic workers are deciding to take loans instead of save. Originally, we started with a small pilot consisting of a team of undergraduate students and faculty members collecting data on the street. We are now planning a larger study to find a large-scale longitudinal panel of domestic workers in Hong Kong and get a representative sample. We plan to interview them repeatedly, and make certain interventions. 

Firstly, we want to provide them with some form of savings technology that creates the discipline that I just described is lacking. If you pre-commit to saving, then the choice is taken out of your hands. When someone then asks you for money, you are therefore unable to do anything. Secondly, I also want to address the kin-tax angle in a different way by providing a financial planning tool for the domestic workers and their families back home. This can help both parties arrive at a shared consensus around their goals for economic migration, which can help weaken kin-tax. The main outcomes we want to look at are whether these interventions change their savings and borrowing behaviour, and whether they help them achieve their financial goals faster. 

Sze Yu: You’ve done a lot of interesting research in applied microeconomics, much of which seems to involve Indian agriculture, and in particular, involve intervention studies and field experiments on villages in West Bengal. What led you to focus on this area, and is there anything about the data gathered from these villages that especially lends itself to unique or useful insights?

Prof. Visaria: Not really. Instead of doing it in West Bengal, we could have done it in some other part of India or even some other country altogether. As economists we like to think we are uncovering mechanisms. We want to demonstrate that these mechanisms exist, albeit to varying extents, almost everywhere. If I can find it in West Bengal, chances are I should be able to find it in Uganda. 

The thing about West Bengal that drew us there is that one of my co authors had a lot of institutional knowledge about the area, which made it easier for us to collect data. For example, some of the research we did was based around potato farming and middlemen margins. In many agricultural markets farmers sell their produce directly to the wholesale market, in which case the farmer is able to directly observe the wholesale market price. In West Bengal, however, the presence of middlemen traders means the farmers often do not observe the wholesale market price, which creates an information asymmetry. That is a very particular institutional structure that you don’t always find. We were interested in how correcting this information asymmetry would change farmer’s negotiations and choices, so having prior area-specific knowledge was relevant there.

Sze Yu: For quite some time, microfinance was portrayed in politics and in the media as a really promising and seemingly straightforward solution to global poverty. Personally, I remember learning about it in middle-school, and it was presented as almost a “miracle cure”. In the past decade, however, certain studies have challenged the effectiveness of traditional forms of microfinance lending. Could you elaborate a little further on the reasons behind this recent shift in perception towards the benefits of microfinance?

Prof. Visaria: There was some research that came out in a 2015 issue of the American Economic Journal that used randomized control trials to examine how effective microfinance was towards changing income levels and reducing poverty. All of the studies found that microfinance had no effect. If you want to know why there is less optimism about the positive effects of microfinance, at least among development economists, then that is essentially the answer. 

We do not seem to find that microfinance has any positive effects on income or assetsof course that is not to say that microfinance does not help at all. Having access to microfinance can still provide you insurance and help you smooth consumption if you are hit by some unforeseen negative shock. It just does not seem to contribute towards increasing average income. The reason behind this is a question that many people are interested in. For example, in 2017, my coauthors and I wrote a paper where we examined this phenomenon by designing an alternative way of delivering microfinance called agent-intermediated lending. Traditionally, microfinance institutions solve the problem of peer selection using group-based lending, where borrowers form groups and are jointly liable for loans. The logic is that, while the microfinance institution may not know whether or not you are a good borrower, your neighbors and other people in your community will, which should help guarantee high repayment rates.

We tried to take a different angle to the problem of credit risk. In our approach, someone in the community who has economic relationships with many of the villagers, such as a trader, acts as an agent to recommend borrowers to the microfinance institution. The agent then earns some fraction of the interest which incentivises them to recommend good borrowers. We compared this approach to the traditional method of group-based lending, and found that agent-intermediated lending had significantly larger positive effects on the incomes of borrowers. Group-based lending, on the other hand, proved to have a minimal effect on the borrower’s outcomes. 

Our explanation is that group-based lending dampens risk-taking. Say you and I are in a group together. In order to avoid having to be liable for repaying each other’s portion of the loan, we will mutually discourage each other from investing in risky projects. As a result, we may instead invest in low-risk low-return projects. Although traditional microcredit lending is good at reducing the risk that the micro-lending institution faces, it seems to be less effective at encouraging entrepreneurship, which might be the most important way that people’s incomes can increase. Other researchers have also pointed out that people who take microloans also might not be the best entrepreneurs to start with. Perhaps the idea that, given enough credit, every poor person will be able to generate a significant return, is just not true.

Sze Yu: Do you foresee any potential issues that might pose obstacles for the implementation of agent-intermediated lending?

Prof. Visaria: One potential issue that people have asked us about concerns the question of inequality. If the agent is recommending borrowers who go on to earn large increases in their income, is it possible that the agent is only recommending those who are the most productive farmers to start with? In that case, you may be only helping the wealthier farmers while ignoring the less productive ones. We actually have a paper we are writing right now that attempts to address this question. Based on our findings, it turns out that the agent is good at identifying farmers that are highly productive but also low-wealth. At least that is what we are seeing in our data. It seems that this agent-intermediated scheme is actually quite good in terms of improving average income while not worsening inequality. 

In terms of practical implementation, there is one question we have wanted to examine that we have not been able to yet: how much do you have to incentivize the agent for the scheme to be effective? In our field experiment, the agent got 75% of interest as commission. However, from the perspective of microfinance institutions, 75% interest as commission is very high. The question is, to what extent can we lower that commission while still maintaining the positive effects of giving out these loans? Or is there some other way to modify this scheme that maintains these effects while reducing the financial burden on microfinance institutions? 

Sze Yu: Would you say that effective agricultural credit plays an important role in India’s economic development?

Prof. Visaria: Yes! The majority of the Indian population still lives in rural areas. It is true that there is a high degree of seasonal and economic migration, but I think a lot of the development is going to have to happen in the countryside. If lack of access to credit is holding down the productivity of farmers, then improving those credit markets will absolutely have big effects.

Sze Yu: Lastly, I’d like to end by talking about your research on whether women (in Hong Kong) receive worse financial advice. What are your findings thus far?

Prof. Visaria: First of all, we chose to look at a very specific definition of good and bad advicethat is, whether financial advisers advise their clients to buy individual risky securities, or to buy a portfolio of securities where the average risk would be lower. Based on this definition, we found that average advice from Hong Kong financial advisers is not very good. We also found a difference depending on the business models that these financial advising firms follow. We found that securities firms, whose revenues mostly come from trading commissions, are more likely to advise you to buy individual risky securities. This is a pretty straightforward observation, since with individual risky securities you are likely to trade more often, which generates more commission. On the other hand, financial planning firms are not just selling securities, but also helping you plan all your finances, which means that they tend not to advise you to buy so many individual risky securities.

However, this subject starts to get more interesting as we shift our attention to the question of gender. We found that, although financial planners on average give better advice, they differentiate between men and women a lot more. Meanwhile, securities firms give you worse advice, but they are equal opportunity bad advisers! (laughs) In our study we had actors who pretended to be clients and went to financial advisers for advice. We varied what the actors signaled to the advisers, in terms of what their risk tolerance level was, how much confidence they had, and whether they were domestically oriented or globally oriented. We found that financial planners are much more likely to give worse advice to women who say that they are highly risk tolerant, highly confident, and have a domestic outlook. 

The theory we have is that financial planners expect women to be less likely to realize if they are being given bad financial advice. Based on the data, this perception is also largely accurate, at least in Hong Kong. Since women are less likely to detect bad advice, if a financial planner had to choose between offering individual risky securities to a man or a woman, they would be more likely to offer it to the woman. Another factor is that financial planners benefit from trying to sell clients things that they think the client is looking for because they are trying to build a long-term relationship. In finance, they call this a catering bias. And so it is a combination of the catering bias, plus the fact that a woman is less likely to detect bad advice, that we think leads us to this result. In summary, yes, women do get worse advice, but it is a little more nuanced in the way that it happens.

Sze Yu: Something interesting that you mentioned was the idea that women are less likely to detect bad financial advice. Has that been empirically observed, or is it more due to cultural bias on the part of these financial planners? It seems like something that would be difficult to quantify. 

Prof. Visaria: Good question. In our paper, we are just stating that this is a perception that financial planners have. But there also is not an inconsistency between this perception, and the results that other people have found in the data. In most countries, researchers have found that women, on average, have less financial literacy. This is quantifiablepeople have tested men and women’s financial knowledge and compared their results. People have also surveyed men and women on how confident they are in their ability to make financial decisions, and women typically report lower confidence scores. Not only do women seem to know less, they seem to be aware that they know less. These types of studies have been replicated in many different countries, as well as in Hong Kong.

If financial advisers have this perception, my guess is that it is probably not totally inaccurate. Of course, the perception may be different if the woman is highly-educated or highly wealthy. These are all fascinating questions, but the study we did was an audit study. In that type of setting, it is very difficult to send in an actor to pretend to be a highly educated woman, or a wealthy woman. If we tried to do that, some of the questions that these auditors were going to ask in the audit survey would have made no sense, and the adviser would have immediately caught on to the fact that this was artificial. So there were limits to what we could do, unfortunately, but I do think it is an interesting question.

Sze Yu: Thank you so much for your time! It has been a pleasure speaking with you.

Featured Image Source: The Hong Kong University of Science and Technology 

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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