Two Credibility Problems Are Better than One: Credit and Local Politics in Rural India

Jacob Goldston, Brown University

This paper proposes a new channel by which a politician may intervene in the credit market without pressuring banks to increase or redirect lending. Instead, the politician can make a constituent into a more attractive credit risk by making her receipt of private government aid conditional on her loan repayment; this allows the constituent to credibly commit to repaying her loan. However, this offer is only credible if the politician values the constituent’s support. I provide evidence from a survey of microcredit groups in South India: constituents with high aid valuation receive more aid, spend more time supporting the politician and his political allies, and receive more credit than constituents with low valuation, but only when the politician is likely to be eligible for reelection. This analysis underscores the importance of local politicians as brokers, which may be very relevant in many contexts across both rich and poor countries.