What does Debt Relief do for Development?

Author: Martin Kanz, The World Bank

Abstract:

This paper analyzes the e ffect of a large debt relief program on investment, productivity and the subsequent financial access of bene ciary households. We carry out a survey of 2,897 households a ected by the Indian Debt Waiver and Debt Relief Program for Small and Marginal Farmers {one of the largest debt relief programs in history. Using a Regression Discontinuity Design based on the program eligibility criteria, we show that debt relief does not improve the investment or productivity of bene ciary households,but leads to a strong and persistent shift of borrowing away from formal sector lenders. We further document strong e ects of debt relief on beliefs about the seniority of debt and the reputational consequences of default. The results resonate with findings from the literature on personal bankruptcy and suggest that bailout programs are of limited use in addressing problems of debt overhang, but have signi cant behavioral implications.

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