Econometrica: Mar 2012, Volume 80, Issue 2

The Distributive Impact of Reforms in Credit Enforcement: Evidence From Indian Debt Recovery Tribunals

https://doi.org/10.3982/ECTA9038
p. 497-558

Ulf von Lilienfeld‐Toal, Dilip Mookherjee, Sujata Visaria

It is generally presumed that stronger legal enforcement of lender rights increases credit access for all borrowers because it expands the set of incentive compatible loan contracts. This result relies on an assumption that the supply of credit is infinitely elastic. In contrast, with inelastic supply, stronger enforcement generates general equilibrium effects that may reduce credit access for small borrowers and expand it for wealthy borrowers. In a firm‐level panel, we find evidence that an Indian judicial reform that increased banks' ability to recover nonperforming loans had such an adverse distributive impact.

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