Do firms want to borrow more? : testing credit constraints using a directed lending program PDF
Preview Do firms want to borrow more? : testing credit constraints using a directed lending program
Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium Member Libraries http://www.archive.org/details/dofirmswanttoborOObane HB31 dewsy .M415 Massachusetts Institute of Technology Department of Economics Working Paper Series DO FIRMS WANT TO BORROW MORE? TESTING CREDIT CONSTRAINTS USING A DIRECTED LENDING PROGRAM* Abhijit Banerjee Esther Duflo Working Paper 02-25 May 2002 Room E52-251 50 Memorial Drive MA Cambridge, 02142 This paper can be downloaded without charge from the Social Science Research Network Paper Collection at http://papers.ssrn,com/paper.taf?abstract id=316587 MASSACHOSEtlTiwSTFfirTr ^FTECHNOLOGY AUG 1 2 2002 LIBRARIES Massachusetts Institute of Technology Department of Economics Working Paper Series DO FIRMS WANT TO BORROW MORE? TESTING CREDIT CONSTRAINTS USING A DIRECTED LENDING PROGRAM* Abhijit Banerjee Esther Duflo Working Paper 02-25 May 2002 Room E52-251 50 Memorial Drive MA Cambridge, 02142 This paper can be downloaded without charge from the Social Science Research Network Paper Collection at http://papers.ssrn.com/paper.taf?abstract_id=XXXXX Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program1* Abhijit V. BanerjeeWd Esther Duflo* May 2002 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 lend- ing 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 un- constrained firms will primarily use it as a substitute for other borrowing. We the apply this methodology to firms in India that became eligible for directed credit as a result of a policy change in 1998. Using firms that were already getting this kind of credit before 1998 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 ofthe firms must have been severely credit constrained. Keywords: Banking, Credit constraints, India JEL: 016, G2 *We thank Tata Consulting Services for their help in understanding the Indian banking Industry, Sankarnaranayan for his work collecting the data, Dean Yang and Niki Klonaris for excellent research assis- tance, and Robert Barro, Sugato Battacharya, Gary Becker, Ehanan Helpman, Sendhil Mullainathan, Kevin Murphy, Raghuram Rajan and Christopher Udry for very useful comments. We are particularly grateful to the administration and the employees ofthe bank we study for their giving us access to thedataweuse in this paper, department ofEconomics, MIT. 'Department ofEconomics, MIT, NBER and CEPR.
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