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What Can We Learn about Financial Access from U.S. Immigrants?. by Una Okonkwo Osili and Anna Paulson Discussion by Inessa Love. Institutions, Perceptions, and Access. Two sides of Institutions: Formal/Reality: Facts, i.e. How do banks work?
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What Can We Learn about Financial Access from U.S. Immigrants? by Una Okonkwo Osili and Anna Paulson Discussion by Inessa Love
Institutions, Perceptions, and Access • Two sides of Institutions: • Formal/Reality: Facts, i.e. How do banks work? • Informal/Perceptions: What do I believe about them? • Experiment: • Holding Reality constant, How do Informal constraints (i.e. my perceptions about how the banks work) affect my participation in Financial Markets? • Conclusion: • Perceptions matter. • Perceptions are influenced by home country institutions. • Perceptions are important for understanding the impact of reform.
Underlying Assumptions • Supply is the same • Same institutional environment in the US • Demand is the same • Personal characteristics capture individual’s demand for financial products • Selection issues • People who immigrate might be different • Control with Country Fixed Effects
Assumption of Equal Supply • Assume that immigrants from different countries face the same institutional environment because they all live in the US. • Ethnic communities and banking costs • Bank branches in ethnic communities • Cost of opening accounts • Ethnic discrimination • Perhaps not a first-order effect, but would be curious to know.
Assumption of Equal Demand • Do we capture all the differences in demand with personal characteristics? • People’s ability, “entrepreneurial” spirit • More informal “cash” based economies • What about alternative sources of savings or investment: informal networks or home-country investment? • Control for this with Ethnic concentration, but only at the MSA level • The paper finds that in highly ethnically concentrated communities there is less access on average (Table 6). • Is this because of different supply or different demand?
Selection: Country Fixed Effects • Is unobserved ability correlated with home-country institutions? • Define “new measure of institutional quality” “Home country “MSA’s Ethnic Institutions ” * concentration” • Use Ethnic concentration as capturing “enforcement” of home-country institutions. • Home country institutions are more important for immigrants who tend to live in ethnic clusters • Home-country rules are more enforced or • Assimilation into US culture is slower in concentrated communities • Does it help if unobserved ability is correlated with demand for financial services?
Perceptions vs. Reality • What comes first? • Reality Perceptions vs. • Perceptions Reality
Causality? Reality of home country institutions Perceptions about institutions (Trust) Use of financial services in the US. Vs. Perceptions about institutions (Trust) Reality: Institutions in Home Country Perceptions (TRUST) Reality: Use of Financial Services in the US Reality: Institutions in Home Country Perceptions (TRUST) Reality: Use of Financial Services in the US
Small empirical issues • Controlling for individual’s demand: • 4 years of data – use time dummies? • Ethnicity is only “non-white” dummy • Include occupation in the main results (more detail?) • Self-employed? • Include Ethnic Concentration in the main results • Country-level measures: • Why use measure of risk of expropriation of private foreign investment? • Why not use LOG of GDP PC? • Why not use more straightforward measures of financial development? • Control for history of bank crises and bank runs in home country and presence of deposit insurance (a more direct measures of the mistrust for banks). • Other measures of culture – i.e., Trust.
Policy Implications • Why bother reforming institutions? • What is the magnitude of the effect of formal institutions vs. informal perceptions? • Is this a first-order effect? Mexican in Mexico Mexican in US Native Born
Access vs. Usage • These people have access but choose not to use financial services • Access ≠ Usage • Better Institutions Less Difference • Will overestimate the impact of institutions on Access if we use Usage as proxy for access Access Usage Institutions
How to Change Perceptions? • Interactions are interesting: • Education reduces “misperception” • High-skill occupation eliminates “misperception” • Citizenship (i.e. formality) has little effect • Any policy interventions? • Financial Literacy • Perceptions are important in understanding the impact of reform.