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 Perceptions (TRUST) Reality: Institutions in Home Country 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 MexicoMexican in USNative 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.