Political Partisanship and the Transmission of Fiscal Policy

Abstract

We argue that voters' political support for the ruling party shapes the transmission of fiscal policy measures that require households' action, especially when political polarization is high. We find that the take-up rates of a large-scale Indian loan-guarantee program (Mudra loans) are higher in electoral districts with higher support for the ruling party measured before the policy was designed and implemented. The divergence in take-up rates is not driven by systematic differences in the composition of electoral districts because it arose only after a pervasive campaign by the Prime Minister several months after the program's launch, which the media had covered extensively. Divergence is persistent and higher in more polarized districts---where the concentration of votes and the vote share of the second-largest party are higher. Characteristics of the demand and supply of loans do not differ across districts based on political support: the credit risk of borrower pools, the interest rates charged to issued loans, the subsequent default rates, as well as the presence of bank branches are similar. Moreover, the characteristics of regular loans issued in the same districts at the same time do not differ. Take-up rates diverge more for Mudra loans taken by individual borrowers rather than by incorporated and/or large businesses, in which multiple decision makers likely vet financing decisions.

Keywords: Heterogeneous Beliefs, Government Spending, Loans, Political Beliefs, Fiscal Policy, Government Programs, Small Businesses, Media Economics, Information Economics.

JEL Classification: D15, D72, E62, E71, G21, G51, H25, H32, O23