Political interference and crowding out in bank lending |
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| Institution: | 1. Université Paris-Dauphine, PSL Research University, France;2. Université d’Orléans, LEO, UMR 7322, France;3. HEC Paris, France;1. Stockholm University, 106 91 Stockholm, Sweden, and Research Institute of Industrial Economics, Box 55665, 112 15 Stockholm, Sweden;2. Saïd Business School, University of Oxford, Park End Street, Oxford OX1 1HP, UK;1. University of Amsterdam, Netherlands;2. CEPR, United Kingdom;3. Olin Business School, Washington University in St. Louis, United States;4. ECGI, Belgium;1. ALBA Graduate Business School, The American College of Greece, 6-8 Xenias Str, 11528 Athens, Greece;2. Bank of Greece, 21 E. Venizelos Ave., 10250 Athens, Greece;3. University of Piraeus, Department of Banking and Financial Management, 80 Karaoli & Dimitriou str., 18534 Piraeus, Greece;4. Surrey Business School, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom;1. Department of International Trade, College of Business Administration, Gyeongsang National University, 501, Jinju-daero, Jinju-si, Gyeongsangnam-do, 52828, South Korea;2. Department of Business Administration, College of Business, Pusan National University, 2, Busandaehak-ro 63beon-gil, Geumjeong-gu, 46241, South Korea;1. London School of Economics, Houghton Street, London WC2A 2AE, UK;2. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK |
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| Abstract: | I provide novel evidence on the real costs of political interference in bank lending. Analyzing staggered state elections in India, I show that politically motivated increased bank lending to farmers before elections crowds out lending to manufacturing firms. These lending distortions are larger where farmers have more political weight and where incumbents have more influence over banks. Reduced bank credit forces manufacturing firms to cut production and operate at lower factor utilization. I also provide evidence suggesting politically motivated increased agricultural lending before state elections contributed towards excessive indebtedness of farmers and a subsequent costly bailout in 2008. |
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