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Unformatted text preview: Burgess & Pande (2003) Credit and Microfinance hinders economic growth (La Porta, Silanes and Shleifer (2002)) India: largest state led rural branch expansion program ever attempted in a low income country – sharp reduction in regional disparities in population served per bank branch – more branches were opened in Indian states with fewer bank branches per capita pre-program (1961) Hence OLS estimates of the impact of rural branch expansion on output likely to be biased Exploit program features to isolate plausibly exogenous (policy driven) determinants of branch expansion in a state, and use these as instruments for number of branches opened in rural, un-banked locations in a state The Social Banking Experiment Branch licensing rule (1977-1990) – a bank must open 4 branches in “unbanked” locations to be eligible to open one in an already banked location 1977-1990: state’s initial financial development and extent of rural branch expansion were negatively related – the reverse was true outside this period 1977 - 1990: output (and more specifically non-agricultural output) fell more in financially less developed states – the opposite was true outside this period Controlling for a state’s initial financial development and its linear trend effect on rural branch expansion, state-wise deviations from the trend in 1977 and 1990 are plausible instruments for the number of branches opened in un-banked locations in a state Data Use bank branch level data set which records opening date and location of every commercial bank branch going back to 1800 to construct three measures – initial financial development measure (Bi1961 ) – number of bank branches per capita in state i in 1961 (i.e. pre-program) – rural branch expansion measure (BR ) – cumulative number of branches it Development Economics, LSE Summer School 2007 121 ...
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