Publication: What Does Debt Relief Do for Development? Evidence from India’s Bailout for Rural Households
Loading...
Files in English
757 downloads
Date
2016-10
ISSN
Published
2016-10
Author(s)
Editor(s)
Abstract
This paper studies the impact of debt relief, using a natural experiment arising from India's "Agricultural Debt Waiver and Debt Relief Scheme," one of the largest household-level debt relief initiatives in history. I find that debt relief has a substantial impact on household balance sheets, but does not affect savings, consumption and investment, as predicted by theories of debt overhang or balance sheet distress. Instead, debt relief leads to greater reliance on informal credit, reduced investment, and lower agricultural productivity. Consistent with moral hazard generated by the bailout, beneficiaries are significantly less concerned about the reputational consequences of future default.
Link to Data Set
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Citations
- Cited 25 times in Scopus (view citations)
Collections
Related items
Showing items related by metadata.
Publication What Does Debt Relief Do for Development? Evidence from India’s Bailout Program for Highly-Indebted Rural Households(2012-11)This paper studies the impact of a large debt relief program, intended to attenuate investment constraints among highly-indebted households in rural India. It isolates the causal effect of bankruptcy-like debt relief settlements using a natural experiment arising from India's Debt Relief Program for Small and Marginal Farmers -- one of the largest debt relief initiatives in history. The analysis shows that debt relief has a persistent effect on the level of household debt, but does not increase investment and productivity as predicted by theories of debt overhang. Instead, the anticipation of future credit constraints leads to a greater reliance on informal financing, lower investment and a decline in productivity among bailout recipients. The results suggest that one-time settlements may be insufficient to incentivize new investment, but can have significant real effects through their impact on borrower expectations.Publication The Economic Effects of a Borrower Bailout : Evidence from an Emerging Market(World Bank Group, Washington, DC, 2014-11)This paper studies the credit market implications and real effects of one the largest borrower bailout programs in history, enacted by the government of India against the backdrop of the 2008-2009 financial crisis. The study finds that the stimulus program had no effect on productivity, wages, or consumption, but led to significant changes in credit allocation and an increase in defaults. Post-program loan performance declines faster in districts with greater exposure to the program, an effect that is not driven by greater risk-taking of banks. Loan defaults become significantly more sensitive to the electoral cycle after the program, suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified.Publication Debt Relief for Households in Developing Economies(Washington, DC: World Bank, 2024-06-26)Households in developing economies have greater access to formal credit today than at any point in history, owing to the global expansion of microfinance and recent innovations in consumer finance, such as digital lending. Although this has improved the ability to smooth consumption and invest in productive activities, it has also raised concerns about over-indebtedness. Against this background, this paper reviews and extends the literature on debt relief for households in developing countries. It begins by laying out a simple stylized model that illustrates the costs and benefits of debt relief. The model is used to guide the review of the evidence on various relief policies, such as debt forbearance, debt forgiveness, and personal bankruptcy. The paper additionally presents survey evidence from a population of microfinance and bank borrowers with recent exposure to debt relief. The results highlight that an important downside of discretionary debt relief policies, which are common in developing countries, is their potential to affect borrower expectations and create moral hazard. The development of legal bankruptcy institutions that offer a rules-based avenue to discharge unsustainable debts is a promising path to alleviate the credit market inefficiencies that have often accompanied debt relief initiatives in developing economies.Publication Incentivizing Calculated Risk-Taking : Evidence from an Experiment with Commercial Bank Loan Officers(World Bank, Washington, DC, 2012-07)This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. The paper first shows that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by loan officers. Second, the paper presents direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.Publication Migrant Labor Markets and the Welfare of Rural Households in the Developing World : Evidence From China(World Bank, Washington, DC, 2008-04)In this paper, the authors examine the impact of reductions in barriers to migration on the consumption of rural households in China. The authors find that increased migration from rural villages leads to significant increases in consumption per capita, and that this effect is stronger for poorer households within villages. Household income per capita and non-durable consumption per capita both increase with out-migration, and increase more for poorer households. The authors also establish a causal relationship between increased out-migration and investment in housing and durable goods assets, and these effects are also stronger for poorer households. The authors do not find robust evidence, however, to support a connection between increased migration and investment in productive activity. Instead, increased migration is associated with two significant changes for poorer households: increases both in the total labor supplied to productive activities and in the land per capita managed by the household. In examining the effect of migration, we pay considerable attention to developing and examining our identification strategy.
Users also downloaded
Showing related downloaded files
Publication Economic Recovery(World Bank, Washington, DC, 2021-04-06)World Bank Group President David Malpass spoke about the world facing major challenges, including COVID, climate change, rising poverty and inequality and growing fragility and violence in many countries. He highlighted vaccines, working closely with Gavi, WHO, and UNICEF, the World Bank has conducted over one hundred capacity assessments, many even more before vaccines were available. The World Bank Group worked to achieve a debt service suspension initiative and increased transparency in debt contracts at developing countries. The World Bank Group is finalizing a new climate change action plan, which includes a big step up in financing, building on their record climate financing over the past two years. He noted big challenges to bring all together to achieve GRID: green, resilient, and inclusive development. Janet Yellen, U.S. Secretary of the Treasury, mentioned focusing on vulnerable people during the pandemic. Kristalina Georgieva, Managing Director of the International Monetary Fund, focused on giving everyone a fair shot during a sustainable recovery. All three commented on the importance of tackling climate change.Publication Europe and Central Asia Economic Update, Fall 2024: Better Education for Stronger Growth(Washington, DC: World Bank, 2024-10-17)Economic growth in Europe and Central Asia (ECA) is likely to moderate from 3.5 percent in 2023 to 3.3 percent this year. This is significantly weaker than the 4.1 percent average growth in 2000-19. Growth this year is driven by expansionary fiscal policies and strong private consumption. External demand is less favorable because of weak economic expansion in major trading partners, like the European Union. Growth is likely to slow further in 2025, mostly because of the easing of expansion in the Russian Federation and Turkiye. This Europe and Central Asia Economic Update calls for a major overhaul of education systems across the region, particularly higher education, to unleash the talent needed to reinvigorate growth and boost convergence with high-income countries. Universities in the region suffer from poor management, outdated curricula, and inadequate funding and infrastructure. A mismatch between graduates' skills and the skills employers are seeking leads to wasted potential and contributes to the region's brain drain. Reversing the decline in the quality of education will require prioritizing improvements in teacher training, updated curricula, and investment in educational infrastructure. In higher education, reforms are needed to consolidate university systems, integrate them with research centers, and provide reskilling opportunities for adult workers.Publication Supporting Youth at Risk(World Bank, Washington, DC, 2008)The World Bank has produced this policy Toolkit in response to a growing demand from our government clients and partners for advice on how to create and implement effective policies for at-risk youth. The author has highlighted 22 policies (six core policies, nine promising policies, and seven general policies) that have been effective in addressing the following five key risk areas for young people around the world: (i) youth unemployment, underemployment, and lack of formal sector employment; (ii) early school leaving; (iii) risky sexual behavior leading to early childbearing and HIV/AIDS; (iv) crime and violence; and (v) substance abuse. The objective of this Toolkit is to serve as a practical guide for policy makers in middle-income countries as well as professionals working within the area of youth development on how to develop and implement an effective policy portfolio to foster healthy and positive youth development.Publication Media and Messages for Nutrition and Health(World Bank, Washington, DC, 2020-06)The Lao People’s Democratic Republic (Lao PDR) has experienced rapid and significant economic growth over the past decade. However, poor nutritional outcomes remain a concern. Rates of childhood undernutrition are particularly high in remote, rural, and upland areas. Media have the potential to play an important role in shaping health and nutrition–related behaviors and practices as well as in promoting sociocultural and economic development that might contribute to improved nutritional outcomes. This report presents the results of a media audit (MA) that was conducted to inform the development and production of mass media advocacy and communication strategies and materials with a focus on maternal and child health and nutrition that would reach the most people from the poorest communities in northern Lao PDR. Making more people aware of useful information, essential services and products and influencing them to use these effectively is the ultimate goal of mass media campaigns, and the MA measures the potential effectiveness of media efforts to reach this goal. The effectiveness of communication channels to deliver health and nutrition messages to target beneficiaries to ensure maximum reach and uptake can be viewed in terms of preferences, satisfaction, and trust. Overall, the four most accessed media channels for receiving information among communities in the study areas were village announcements, mobile phones, television, and out-of-home (OOH) media. Of the accessed media channels, the top three most preferred channels were village announcements (40 percent), television (26 percent), and mobile phones (19 percent). In terms of trust, village announcements were the most trusted source of information (64 percent), followed by mobile phones (14 percent) and television (11 percent). Hence of all the media channels, village announcements are the most preferred, have the most satisfied users, and are the most trusted source of information in study communities from four provinces in Lao PDR with some of the highest burden of childhood undernutrition.Publication Remarks at the United Nations Biodiversity Conference(World Bank, Washington, DC, 2021-10-12)World Bank Group President David Malpass discussed biodiversity and climate change being closely interlinked, with terrestrial and marine ecosystems serving as critically important carbon sinks. At the same time climate change acts as a direct driver of biodiversity and ecosystem services loss. The World Bank has financed biodiversity conservation around the world, including over 116 million hectares of Marine and Coastal Protected Areas, 10 million hectares of Terrestrial Protected Areas, and over 300 protected habitats, biological buffer zones and reserves. The COVID pandemic, biodiversity loss, climate change are all reminders of how connected we are. The recovery from this pandemic is an opportunity to put in place more effective policies, institutions, and resources to address biodiversity loss.