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 beneciary
households …consistent with evidence from the literature on personal bankruptcy, which
shows that households typically accumulate new debt very quickly after a settlement.
clearing beneficiaries’ collateral did not have the intended effect of increasing… access to new bank credit
debt relief does not increase the investment or productivity of beneficiary households. …we show that beneficiary 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 financing.
debt relief has a strong effect 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 beneciaries would default on a formal sector loan before any other claim by 2.3%.
Similarly, beneciary households are sitgnicantly less concerned about the reputational eects of non-repayment in the case of loans issued by commercial or cooperative banks.
A new paper from Martin Kanz.