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Creditor Rights And Allocative Distortions: Evidence From India

Author

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  • Nirupama Kulkarni

    (Centre for Advanced Financial Research and Learning (CAFRAL))

Abstract

This paper highlights how stronger creditor rights improve allocative efficiency of credit and capital in the economy. Exploiting a collateral reform in India that strengthened creditor rights, I show that lenders cut credit to riskier borrowers. This is partly driven by a reduction in credit to otherwise insolvent borrowers (zombies). Importantly, credit access improved for non-zombie firms in industries that became decongested due to reductions in credit to zombie firms. As a result, non-zombie firms increased investment. Aggregate productivity of capital improved due to within-firm improvements and reallocation of capital to more productive firms, as well as due to their positive spillovers through the input-output linkages of the decongested industries.

Suggested Citation

  • Nirupama Kulkarni, 2019. "Creditor Rights And Allocative Distortions: Evidence From India," Working Papers 022305, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022305
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    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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