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

56 Pages Posted: 28 Jun 2002 Last revised: 18 Feb 2009

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

This paper uses variation in access to a targeted lending program to estimate whether firms are credit constrained. The basic idea is that 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. Using firms that were already getting this kind of credit before 1998, and retained eligibility in 2000 to control for time trends, 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 production-there was a large acceleration in the rate of growth of sales and profits for these 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.

Keywords: Banking, Credit Constraints, India

JEL Classification: O16, G2

Suggested Citation

Banerjee, Abhijit V. and Duflo, Esther, Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program (May 2008). MIT Department of Economics Working Paper No. 02-25. Available at SSRN: https://ssrn.com/abstract=316587 or http://dx.doi.org/10.2139/ssrn.316587

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Esther Duflo (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-544
Cambridge, MA 02139
United States
617-258-7013 (Phone)
617-253-6915 (Fax)

Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

Cambridge, MA
United States

HOME PAGE: http://www.povertyactionlab.org/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

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