Working Papers

We study the impact of regulations expanding bank branching in India. We find that public sector banks (PSBs) reduce their lending to poorly performing firms when branching expands in a district. Non-performing loans at PSBs also increase when branching expands. Also, inefficient firms that depend on PSBs deleverage and are more likely to exit after branching expands in a district. At the plant level, exposure to branching is associated with an expansion in size and employment. These results suggest that greater credit market competition can lead to more efficient lending and increased economic activity in economies with protected credit markets.

We show that investors reach for yield by taking more duration risk along with more credit risk. The two types of risk-taking behavior have opposite effects on borrowing firms. Higher credit risk-taking increases credit supply to riskier firms. Higher duration risk-taking by investors pushes firms to extend issuance maturity and pay higher interest rates to obtain capital. These firms reduce borrowing and investment as a result. The underlying mechanism is the presence of supply-side frictions in investment-grade corporate debt markets. The results suggest that policymakers should take investor risk choice into account when evaluating the stimulative benefits of low interest rates.

As power generation by renewable sources increases, power transmission patterns over the electric grid change. We show that due to physical laws, these new transmission patterns lead to non-intuitive grid congestion externalities. We derive the conditions under which network externalities due to power trades occur. Calibration shows that each additional unit of power traded between northern and western Europe reduces transmission capacity for the southern and eastern regions by 27% per unit traded. Given such externalities, new investments in the electric grid infrastructure cannot be made piecemeal. Power transit fares can help finance investment in regions facing network congestion externalities.