Where Does It Go? Spending by the Financially Constrained

Shawn A. Cole; John  Thompson; Peter  Tufano

Working Paper | HBS Working Paper Series | 2008

Where Does It Go? Spending by the Financially Constrained

by Shawn A. Cole, John Thompson and Peter Tufano

Abstract

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

Keywords: Decision Choices and Conditions; Credit; Personal Finance; Spending; Taxation; Consumer Behavior; United States;

Language: English

Format: Print

40 pages

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Citation:

Cole, Shawn A., John Thompson, and Peter Tufano. "Where Does It Go? Spending by the Financially Constrained." Harvard Business School Working Paper, No. 08-083, March 2008. (Revised April 2008.)

Impact investing has grown significantly over the past 15 years. From a niche investing segment with only $25 billion AUM in 2013 (WEF 2013), it experienced double-digit growth and developed into a market with an estimated $502 billion AUM (Mudaliapar and Dithrich 2019). Despite the growth and maturation of impact investing, gathering complete and accurate data on the characteristics of this industry continues to be a challenge. This paper describes the creation of a new dataset on both impact investors and the portfolio companies they fund, comprising 409 impact investors and 13,212 portfolio companies. We code impact investors according to established categories such as legal form, types of investments and return objectives. We then develop measures of the relative importance of social impact for each investor in an effort to add a new analytic categorization. We conclude by describing the distribution of investors and firms across these various categories.

Working Paper | 2020

Anchors Aweigh: Analysis of Anchor Limited Partner Investors in Impact Investment Funds

Shawn A. Cole, Rob T. Zochowski, Fanele Mashwama and Heather McPherson

This note describes results from a survey of “anchor investors” in impact funds. Anchor investors are described as “generally the first investor to make a substantial capital commitment to a fund,” (according to the Global Impact Investing Network, “GIIN”) and their role is often thought to be an important determinant of the fund’s ultimate ability to raise meaningful amounts of investable capital. We survey 13 fund managers, who collectively provide information for 28 funds. We also conduct qualitative interviews with six anchor investors. We find the following: the average number of anchor investors per fund is one; however, 16 out of 28 funds report having no anchor investor; anchor investors invest $8 million into funds on average whereas non-anchors invest $4.5 million. We also note that reinvestment rates seem relatively low: anchor investors reinvest in subsequent funds in 8% of cases, while non-anchors reinvest 17% of the time. We show that the type of investors who are anchor investors is similar to that of non-anchor investors. Our results suggest that anchor investors can play a valuable market-building role for impact fund managers. The large investments anchors make may be particularly helpful to new fund managers who might have limited distribution and sales capacities. Interviews with anchor investors also suggest a catalytic “halo” effect for funds receiving anchor investments, as funds benefit from an early endorsement by a respected investor. A limitation of this study is its relatively small sample size, which precludes us from investigating potentially interesting relationships. We nevertheless believe this note has value, as this is perhaps the first and only investigation of the role of anchor investors in the formation of new funds. Many larger investors have articulated a desire not just to invest for impact, but to seed and support the industry.

Citation:

Cole, Shawn A., Rob T. Zochowski, Fanele Mashwama, and Heather McPherson. "Anchors Aweigh: Analysis of Anchor Limited Partner Investors in Impact Investment Funds." Working Paper, May 2020. View Details

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We have each experienced thrills and pain while supporting the mission of the Abdul Latif Jameel Poverty Action Lab, which facilitated many of the experiments described in the 2019 Nobel Prize citation. J-PAL in many ways seeks to fulfill what Angrist and Pischke called the “Credibility Revolution in Empirical Economics.” Even though (or perhaps because) we have conducted many RCTs, we share many of the concerns that critics have highlighted: high cost, long time lags, and limits to generalizability. Yet, we are quite optimistic that the impact and reach of experimental work in economics and policy will only grow. We see two complementary developments that will make RCTs cheaper, faster, larger, and ultimately substantially more insightful. First, a new research literature seeks to improve the design of experiments, and what we can learn from them, through improved methodologies, meta-analyses, and improved understanding of heterogeneity. Second, the rise of administrative data rapidly opens new frontiers of investigation, in particular the possibility of “closed-loop” data environments, in which interventions can be delivered and evaluated digitally, often on very large samples, and often iteratively.

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Where Does It Go? Spending by the Financially Constrained

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