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Fixing Market Failures or Fixing Elections? Agricultural Credit in India

  • Shawn A. Cole


    (Harvard Business School, Finance Unit)

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 non-election 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.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-001.

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Length: 50 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:hbs:wpaper:09-001
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  1. Case, A., 1997. "Election Goals and Income Redistribution: Recent Evidence from Albania," Papers 177, Princeton, Woodrow Wilson School - Development Studies.
  2. Rafael La Porta & Florencio Lopezde-Silanes & Andrei Shleifer, 2000. "Government Ownership of Banks," NBER Working Papers 7620, National Bureau of Economic Research, Inc.
  3. 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.
  4. Levitt, Steven D & Snyder, James M, Jr, 1997. "The Impact of Federal Spending on House Election Outcomes," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 30-53, February.
  5. Akhmed Akhmedov & Ekaterina Zhuravskaya, 2004. "Opportunistic Political Cycles: Test in a Young Democracy Setting," Economics Working Papers 0047, Institute for Advanced Study, School of Social Science.
  6. Besley, T., 1993. "Savings, Credit and Insurance," Papers 167, Princeton, Woodrow Wilson School - Development Studies.
  7. repec:oup:qjecon:v:120:y:2005:i:4:p:1371-1411 is not listed on IDEAS
  8. 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.
  9. Shawn A. Cole, 2007. "Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?," Harvard Business School Working Papers 09-002, Harvard Business School.
  10. Dahlberg, Matz & Johansson, Eva, 1999. "On the Vote Purchasing Behavior of Incumbent Governments," Working Paper Series 1999:24, Uppsala University, Department of Economics.
  11. repec:oup:qjecon:v:119:y:2004:i:4:p:1301-1338 is not listed on IDEAS
  12. Snyder, James M, 1989. "Election Goals and the Allocation of Campaign Resources," Econometrica, Econometric Society, vol. 57(3), pages 637-60, May.
  13. repec:oup:restud:v:58:y:1991:i:2:p:277-97 is not listed on IDEAS
  14. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
  15. 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.
  16. 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, vol. 82(2), pages 464-484, March.
  17. 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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