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.
"What Does Debt Relief Do for Development? Evidence from India's Bailout for Rural Households."
American Economic Journal: Applied Economics,
Household Saving; Personal Finance
Financial Institutions and Services: Government Policy and Regulation
Microeconomic Analyses of Economic Development
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
Agricultural Policy; Food Policy