Do firms want to borrow more?
Subtitle: testing credit constraints using a directed lending program
By: Abhijit Banerjee, Esther Duflo
Contributors: Duflo, Esther, 1972-; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-25; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-25.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2002
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 30
Description: 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 lending 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 unconstrained firms will primarily use it as a substitute for other borrowing.We then 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 of the firms must have been severely credit constrained. Keywords: Banking, Credit Constraints, India. JEL Classifications: O16, G2
Notes: "May 2002."

Includes bibliographical references (p. 29-30).

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