Credit Lines as Insurance: Evidence from Bangladesh Gregory Lane∗ November 2, 2020 Abstract Lending institutions often withhold credit from borrowers who have suffered an income shock because they are concerned about default risk. This can be especially debilitating in low-income countries because households have few resources to manage these shocks. I show that a loan product that guarantees credit access to agricultural households following a negative shock increases their welfare through two channels: an ex-ante insurance effect, whereby households increase investments in risky but profitable production; and an ex-post effect, whereby households use the loan to smooth consumption. Repayment is high and the loan is profitable for the lender { demonstrating that guaranteed credit is a valuable risk-mitigation tool for households that need not jeopardize lenders profits. ∗American University, Department of Economics, 105 Kreeger Hall, Washington DC 20016 (email:
[email protected]). I gratefully acknowledge the financial support of BASIS and Feed the Future. I would like to thank my partner BRAC for their collaboration, and in particular Hitoishi Chakma, Monirul Hoque, and Faiza Farah Tuba for their invaluable assistance. I thank Fiona Burlig, Kyle Emerick, Fred Finan, Sylvan Herskowitz, Alain de Janvry, Erin Kelley, John Loeser, Jeremy Magruder, Aprajit Mahajan, Edward Miguel, Edward Rubin, and Elisabeth Sadoulet for their comments. All errors are my own. AEA RCT identification number: 0001287. This project received IRB approval from UC Berkeley (#2015-12-8181) Credit Lines as Insurance Gregory Lane 1 Introduction Households in low-income countries are vulnerable to a host of shocks and stressors that can drive them into poverty.