Digital Finance and the Micro and Small Economy amid Unexpected Crises

Can digital finance help enhance the resilience and vitality of the micro and small economy in response to shocks from unexpected crises? This question is important for clarifying the development path of digital finance and understanding the dynamics of the micro and small economy. This study matches Alipay data on micro and small merchants with the Peking University Digital Financial Inclusion Index at the county level. Treating local COVID-19 outbreaks from May 2020 to July 2021 as a quasi-natural experiment, it constructs a staggered difference-in-differences model to examine the effects of digital finance on the operations of micro and small merchants amid unexpected crisis shocks and the underlying mechanisms. The findings show that digital finance effectively mitigated the shocks experienced by micro and small merchants. By alleviating their financial pressures, increasing their business activity, and enabling digital operations, digital finance performed both financing and technological-enablement functions, providing these merchants with financial and technical support and helping them cope with supply shocks, demand contraction, and weakening expectations. The effects of digital finance were more pronounced in regions with higher levels of household consumption. Service-sector micro and small merchants and those owned by young and middle-aged individuals benefited more from digital finance. These findings provide important insights for fostering a favorable environment that supports the balanced and sustainable development of digital finance, guiding its integrated and symbiotic development with the real economy, and promoting inclusive economic growth.