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Fixing Market Failures or Fixing Elections? Agricultural Credit in India

  • Shawn Cole

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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.1.1.219
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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, vol. 57(1), pages 265-301, 02.
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  8. Steven D. Levitt & James M. Snyder, Jr., 1995. "The Impact of Federal Spending on House Election Outcomes," NBER Working Papers 5002, National Bureau of Economic Research, Inc.
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  11. 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.
  12. Snyder, James M, 1989. "Election Goals and the Allocation of Campaign Resources," Econometrica, Econometric Society, vol. 57(3), pages 637-60, May.
  13. Robin Burgess & Rohini Pande & Grace Wong, 2005. "Banking for the Poor: Evidence From India," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 268-278, 04/05.
  14. 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.
  15. Khemani, Stuti, 2004. "Political cycles in a developing economy: effect of elections in the Indian States," Journal of Development Economics, Elsevier, vol. 73(1), pages 125-154, February.
  16. 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 402, World Bank - Technical Papers.
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