Claire Shi

We use data from a major South African payment processor to study how digital payments mitigate asymmetric information challenges in small business "revenue-based financing" contracts, which tie repayment schedules to future revenue. Eight months post-financing, digital payments through the processor are 15% lower for takers than observably similar non-takers. We show this "gap" can be decomposed into three components: moral hazard from revenue hiding, adverse selection, and the causal effect of financing for takers. Two natural experiments suggest that takers shift more revenue off the platform when competition increases (moral hazard), and that financiers can increase repayment by waiting longer before extending offers (adverse selection). With estimates from both experiments, we bound the gap components, finding substantial adverse selection, but also positive short-run causal effects. Our results suggest digital payment platforms with "sticky" features can alleviate classic risk-sharing frictions by imposing hiding costs and limiting hidden information.

This thesis studies the Paycheck Protection Program (PPP)—a 660 billion dollar small business loan program enacted in April 2020 in response to the COVID-19 pandemic. The majority of small businesses could apply for (and receive) a forgivable loan, but I find that PPP uptake differs dramatically across space. To study this geographic variation, I first present a theoretical framework for PPP. One key prediction is that even though supply-side barriers limited PPP uptake in places that had weak banking relationships in the first round, business human capital should have been able to substitute for bank human capital during the second round. Second, I use a combination of county and firm-level data to demonstrate that in line with theory, places that received very little PPP overall had both low bank and low business human capital. Finally, factors such as COVID-19 impact or political attitudes were not key determinants in predicting PPP uptake. Consequently, even though PPP was designed for COVID-19, the distribution of PPP loans was fundamentally about human capital and institutions rather than pandemic impact.