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Fixing Market Failures or Fixing Elections? Agricultural Credit in India

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  • Shawn Cole

Abstract

This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in nonelection years or in private bank lending. I show capture is costly: elections affect loan repayment, and election-year credit booms do not measurably affect agricultural output. (JEL D72, O13, O17, Q14, Q18)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 1 (2009)
Issue (Month): 1 (January)
Pages: 219-50

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Handle: RePEc:aea:aejapp:v:1:y:2009:i:1:p:219-50

Note: DOI: 10.1257/app.1.1.219
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  1. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 265-301, 02.
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  3. Dahlberg, Matz & Johansson, Eva, 1999. "On the Vote Purchasing Behavior of Incumbent Governments," Working Paper Series, Uppsala University, Department of Economics 1999:24, Uppsala University, Department of Economics.
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  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Shawn Cole, 2009. "Financial Development, Bank Ownership, and Growth: Or, Does Quantity Imply Quality?," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 33-51, February.
  9. Khemani, Stuti, 2004. "Political cycles in a developing economy: effect of elections in the Indian States," Journal of Development Economics, Elsevier, Elsevier, vol. 73(1), pages 125-154, February.
  10. Case, A., 1997. "Election Goals and Income Redistribution: Recent Evidence from Albania," Papers, Princeton, Woodrow Wilson School - Development Studies 177, Princeton, Woodrow Wilson School - Development Studies.
  11. Khemani, Stuti, 2007. "Does delegation of fiscal policy to an independent agency make a difference? Evidence from intergovernmental transfers in India," Journal of Development Economics, Elsevier, Elsevier, vol. 82(2), pages 464-484, March.
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  13. Dinar, A. & Mendelsohn, R. & Evenson, R. & Parikh, J. & Sanghi, A. & Kumar, K. & McKinsey, J. & Lonergen, S., 1998. "Measuring the Impact of CLimate Change on Indian Agriculture," Papers, World Bank - Technical Papers 402, World Bank - Technical Papers.
  14. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, Elsevier, vol. 72(2), pages 357-384, May.
  15. Steven D. Levitt, 1995. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Policeon Crime," NBER Working Papers 4991, National Bureau of Economic Research, Inc.
  16. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1371-1411, November.
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