The Distributive Impact of Reforms in Credit Enforcement: Evidence from Indian Debt Recovery Tribunals
61 Pages Posted: 8 Apr 2011
Date Written: December 16, 2010
It is generally presumed that strengthening the legal enforcement of lender rights increases credit access for all borrowers, by expanding the set of incentive-compatible loan contracts. This presumption is based on an implicit assumption of infinitely elastic supply of loans. With inelastic supply, strengthening enforcement generates general equilibrium effects which may reduce credit access for small borrowers, while expanding it for wealthy borrowers. In a firm-level panel, we find evidence of such adverse distributional impacts caused by an Indian judicial reform in the 1990s which increased banks' ability to recover non-performing loans.
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