The hazards of piecemeal reform: British civil courts and the credit market in colonial India

The colonial experience of developing countries provides valuable evidence regarding the impact of legal and institutional innovations on economic growth. However, there has been little effort by economists to study colonial policies to gain theoretical insights into the process of institutional reform. This paper considers the introduction of civil courts in colonial India and its impact on agricultural credit markets in the Bombay Deccan. Drawing on historical records and a formal analysis of the credit market, the paper finds that the reform led to increased competition among lenders. Ex ante, we expect that this would have raised farmers' welfare. But increased competition also reduced lenders' incentives to subsidize farmers' investments in times of crisis, leaving them more vulnerable in bad times. (C) 1999 Elsevier Science B.V. All rights reserved.

Duke Scholars

Author Rachel Kranton Economics