Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program

By Abhijit Banerjee, Esther Duflo. 2014

953 citations recorded by the source corpus.

This article uses variation in access to a targeted lending program to estimate whether firms are credit constrained. While both constrained and unconstrained firms may be willing to absorb all the directed credit that they can get (because it may be cheaper than other sources of credit), constrained firms will use it to expand production, while unconstrained firms will primarily use it as a substitute for other borrowing. We apply these observations to firms in India that became eligible for directed credit as a result of a policy change in 1998, and lost eligibility as a result of the reversal of this reform in 2000, and to smaller firms that were already eligible for the preferential credit before 1998 and remained eligible in 2000. Comparing the trends in the sales and the profits of these two groups of firms, we show that there is no evidence that directed credit is being used as a substitute for other forms of credit. Instead, the credit was used to finance more productionâ€“there was a large acceleration in the rate of growth of sales and profits for these firms in 1998, and a corresponding decline in 2000. There was no change in trends around either date for the small firms. We conclude that many of the firms must have been severely credit constrained, and that the marginal rate of return to capital was very high for these firms.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4c37def9e750c3f7e5643e57e8e82755d560d6ae

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Citations in the corpus

Interfirm Relationships and Business Performance (2018, positive): “31 Much of this work has explored the diffusion of technology (Bandiera and Rasul 2006, Conley and Udry 2010), and financial choices (Duflo and Saez 2003, Hong, Kubik and Stein 2004, Banerjee et al. 2013, Cai et al. 2015) in the social networks of individuals. More recent work on the diffusion of bu”
Rural Financial Markets in Developing Countries (2005, neutral): “A closely related interpretation of monitoring by Banerjee et al. (1994) is that monitoring increases the borrower’s probability of success, or in terms of this simple model, that it raises p relative to q.”
Barriers to entry and returns to capital in informal activities : evidence from Sub-Saharan Africa (2011, positive): “With respect to the causes of the observed pattern of high returns at relatively low levels of capital, the evidence is inconclusive, although some findings do suggest an important role for capital market constraints (Banerjee and Duflo, 2004; Schündeln, 2006; de Mel et al., 2008).”
Misallocation and Capital Market Integration: Evidence From India (2020, neutral): “In the context of low-income countries, where formal credit markets are limited and informal credit markets are a poor substitute (Townsend, 1994; Udry, 1994; Banerjee, Duflo, Glennerster, and Kinnan, 2015), credit constraints are likely to be large (Banerjee, Duflo, and Munshi, 2003; Banerjee and D”
African Economic Outlook 2012 (2012, background): “…returns to capital in the urban informal sector are high, often in the range of 60 to 70% annually, in particular at very low levels of capital (Banerjee and Duflo, 2004; McKenzie and Woodruff, 2006; De Mel et al., 2008; McKenzie and Woodruff, 2008; Kremer et al., 2010; Fafchamps et al., 2011;…”
Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India † (2013, background): “In urban Hyderabad, Banerjee et al. (2009) report that roughly 50 percent of MFI borrowers had businesses of some kind.”
Observing unobservables: Identifying information asymmetries with a consumer credit field experiment (2005, positive): “…on the real economy tends to take some reduced-form credit constraint as given (e.g., Wasmer and Weil (2004)), or as a hypothesis to be tested (e.g., Banerjee and Duflo (2004)), without evidence of a specific friction that may (or may not) actually produce a sub-optimal allocation of credit.”