DP10848 | Mobile Money, Trade Credit, and Economic Development: Theory and Evidence

Publication Date

27/09/2015

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Abstract

Using a novel enterprise survey from Kenya (FinAccess Business), we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We develop a dynamic general equilibrium model with heterogeneous entrepreneurs, imperfect credit markets and the risk of theft to account for this empirical pattern. Mobile money dominates fiat money as a medium of exchange in its capacity to avoid theft, but comes with higher transaction costs. The interaction between risk of theft and limited access to trade credit generates demand for mobile money as a payment method with suppliers and the use of mobile money in turn raises the value of a credit relationship and hence the willingness to apply for trade credit. Calibrating the stationary equilibrium to match a set of moments that we observe in Kenyan FinAcces enterprise survey data and quantifying the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development, we find that the availability of the mobile money technology increases GDP by 0.33-0.47%.