Short Term Cost of Cash and Mobile Financial Services: Evidence from a natural experiment in India

Résumé

The use of digital financial services (DFS) in developing countries can be a tool for financial inclusion, curbing tax evasion, and facilitating the efficient delivery of public services. Using a unique event { an un-announced and large scale demonetization process that took place in 2016 in India that increased the short-term costs of holding and transacting in cash, we study the uptake of a specic form of DFS, namely mobile payments, in India. We find that in states where the labour market was less formal, and where workers were more likely to be affected by the demonetisation process, this shock led to a larger increase in the use of platforms larger than in states where the labour market is more formal. The effect of this "forced experimentation" was, however, short lived. At the individual level, people who were more exposed to the shock were more likely to adopt mobile payments and this effect persists over the next two years. Strikingly, the marginal effects of the shock for high-exposure women was almost twice as high as for high-exposure men. Our results contribute to understanding user behaviour and persistence of habits, with important implications for the design of policies aimed at increasing the uptake of digital payment technologies.