Political Economy of Bank Lending

Of late there has been a growing interest in political economy of government spending in India. So far the focus has been on spending at the state or central level as well as center-state fiscal transfers. This paper by Shawn Cole however, looks at the effect of elections on bank lending in India.

It integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture. Studying banks in India, Cole finds that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in nonelection years or in private bank lending. Cole shows that capture is costly: elections affect loan repayment, and election-year credit booms do not measurably affect agricultural output.



Cole Shawn (2009), Fixing Market Failures or Fixing Elections? Agricultural Credit in India, American Economic Journal: Applied Economics, 1:1, 219-250.