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

54 Pages Posted: 16 Dec 2004

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: October 2004

Abstract

We begin the Paper by laying out a simple methodology that allows us to determine whether firms are credit constrained, based on how they react to changes in directed lending programs. 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 then apply this methodology 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 significant 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.

Keywords: Banking, credit constraints, India

JEL Classification: G20, O16

Suggested Citation

Banerjee, Abhijit V. and Duflo, Esther, Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program (October 2004). CEPR Discussion Paper No. 4681. Available at SSRN: https://ssrn.com/abstract=636041

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 )

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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)

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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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