IDEAS home Printed from https://ideas.repec.org/p/hbs/wpaper/09-001.html
   My bibliography  Save this paper

Fixing Market Failures or Fixing Elections? Agricultural Credit in India

Author

Listed:
  • Shawn A. Cole

    (Harvard Business School, Finance Unit)

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 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.

Suggested Citation

  • Shawn A. Cole, 2008. "Fixing Market Failures or Fixing Elections? Agricultural Credit in India," Harvard Business School Working Papers 09-001, Harvard Business School.
  • Handle: RePEc:hbs:wpaper:09-001
    as

    Download full text from publisher

    File URL: http://www.hbs.edu/research/pdf/09-001.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Dinc, I. Serdar, 2005. "Politicians and banks: Political influences on government-owned banks in emerging markets," Journal of Financial Economics, Elsevier, vol. 77(2), pages 453-479, August.
    3. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, vol. 95(3), pages 780-795, June.
    4. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    5. 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, February.
    6. Akhmed Akhmedov & Ekaterina Zhuravskaya, 2004. "Opportunistic Political Cycles: Test in a Young Democracy Setting," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1301-1338.
    7. Chhibber, Pradeep & Kollman, Ken, 1998. "Party Aggregation and the Number of Parties in India and the United States," American Political Science Review, Cambridge University Press, vol. 92(2), pages 329-342, June.
    8. 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.
    9. Levitt, Steven D, 1997. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime," American Economic Review, American Economic Association, vol. 87(3), pages 270-290, June.
    10. Dahlberg, Matz & Johansson, Eva, 2002. "On the Vote-Purchasing Behavior of Incumbent Governments," American Political Science Review, Cambridge University Press, vol. 96(1), pages 27-40, March.
    11. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    12. 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.
    13. Case, Anne, 2001. "Election goals and income redistribution: Recent evidence from Albania," European Economic Review, Elsevier, vol. 45(3), pages 405-423, March.
    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. 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.
    16. Snyder, James M, 1989. "Election Goals and the Allocation of Campaign Resources," Econometrica, Econometric Society, vol. 57(3), pages 637-660, May.
    17. 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.
    18. Besley, Timothy, 1995. "Savings, credit and insurance," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 36, pages 2123-2207, Elsevier.
    19. E. Sridharan, 1999. "Toward state funding of elections in india? a comparative perspective on possible options," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(3), pages 229-254.
    20. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    21. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1371-1411.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Çağatay Bircan & Orkun Saka, 2021. "Lending Cycles and Real Outcomes: Costs of Political Misalignment," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2763-2796.
    2. Kumar, Nitish, 2020. "Political interference and crowding out in bank lending," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    3. Faraz, Naseem & Rockmore, Marc, 2020. "Election cycles in public credit: Credit provision and default rates in Pakistan," Journal of Development Economics, Elsevier, vol. 147(C).
    4. Çağatay Bircan & Orkun Saka, 2021. "Lending Cycles and Real Outcomes: Costs of Political Misalignment," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2763-2796.
    5. Bircan, Çağatay & Saka, Orkun, 2019. "Lending cycles and real outcomes: Costs of political misalignment," BOFIT Discussion Papers 1/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
    6. repec:zbw:bofitp:2019_001 is not listed on IDEAS
    7. Ghosh, Saibal, 2022. "Elections and provisioning behavior: Assessing the Indian evidence," Economic Systems, Elsevier, vol. 46(1).
    8. Ayyagari, Meghana & Beck, Thorsten & Hoseini, Mohammad, 2020. "Finance, law and poverty: Evidence from India," Journal of Corporate Finance, Elsevier, vol. 60(C).
    9. Sandip Sukhtankar, 2012. "Sweetening the Deal? Political Connections and Sugar Mills in India," American Economic Journal: Applied Economics, American Economic Association, vol. 4(3), pages 43-63, July.
    10. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2012. "Financing of firms in developing countries : lessons from research," Policy Research Working Paper Series 6036, The World Bank.
    11. Cole, Shawn & Healy, Andrew & Werker, Eric, 2012. "Do voters demand responsive governments? Evidence from Indian disaster relief," Journal of Development Economics, Elsevier, vol. 97(2), pages 167-181.
    12. Saibal Ghosh, 2020. "Bank Lending and Monetary Transmission: Does Politics Matter?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 359-381, June.
    13. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, vol. 95(3), pages 780-795, June.
    14. Saibal Ghosh, 2018. "Electoral Cycles and Project Outcomes," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(2), pages 527-552, June.
    15. Cameron Shelton, 2014. "Legislative budget cycles," Public Choice, Springer, vol. 159(1), pages 251-275, April.
    16. Meghana Ayyagari & Asli Demirguc-Kunt & Vojislav Maksimovic, 2021. "Are large firms born or made? Evidence from developing countries," Small Business Economics, Springer, vol. 57(1), pages 191-219, June.
    17. Ugo Panizza, 2013. "Guest Workers: Financial Development and Economic Growth: Known Knowns, Known Unknowns, and Unknown Unknowns," IHEID Working Papers 13-2013, Economics Section, The Graduate Institute of International Studies.
    18. Asli Demirgüç-Kunt & Ross Levine, 2008. "Finance, Financial Sector Policies, and Long-Run Growth," World Bank Publications - Books, The World Bank Group, number 28021, December.
    19. 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.
    20. Prachi Mishra & Nagpurnanand Prabhala & Raghuram G Rajan, 2022. "The Relationship Dilemma: Why Do Banks Differ in the Pace at Which They Adopt New Technology?," Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3418-3466.
    21. Nicholas S. Coleman & Leo Feler, 2014. "Bank Ownership, Lending, and Local Economic Performance During the 2008-2010 Financial Crisis," International Finance Discussion Papers 1099, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hbs:wpaper:09-001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: HBS (email available below). General contact details of provider: https://edirc.repec.org/data/harbsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.