Should states help out the heavily indebted poor? A cautionary tale from India:
debt relief leads to only a moderate improvement in the overall level of household debt among bene ciary
households …consistent with evidence from the literature on personal bankruptcy, which
shows that households typically accumulate new debt very quickly after a settlement.
clearing bene ficiaries’ collateral did not have the intended eff ect of increasing… access to new bank credit
debt relief does not increase the investment or productivity of benefi ciary households. …we show that benefi ciary households, in fact reduce investment in irrigation and agricultural inputs by as much as 7%, potentially as a direct result of the shift towards more expensive sources of fi nancing.
debt relief has a strong eff ect on expectations about the reputational consequences of default and perceptions about the seniority of debt; a one standard deviation increase in the amount of debt relief increases the probability that bene ciaries would default on a formal sector loan before any other claim by 2.3%.
Similarly, bene ciary households are sitgni cantly less concerned about the reputational e ects of non-repayment in the case of loans issued by commercial or cooperative banks.
A new paper from Martin Kanz.