Contagious Effects of a Political Intervention in Debt Contracts: Evidence Using Loan-Level Data

Prasanna L Tantri

The Review of Financial Studies, 2018, vol. 31, issue 11, 4556-4592

Abstract: Using an unexpected government regulation that restricted the ability of microfinance institutions to recover loans in one Indian state, I examine whether this intervention affected bank loan performance. The bank loan delinquency rate significantly increased as a result. In response, the ex post bank credit supply declined by more than half. For identification, I compare loans from branches located in regions subject to this intervention with loans from nearby branches of the same bank located in regions not subject to the intervention. I conclude that political interventions in credit markets could have significant spillover effects.Received October 29, 2016; editorial decision November 28, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2018
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