Assualt on incentives - the case of farm loan waivers

Talking of assault on incentives and the moral hazard concerns arising from loan waivers, Mint writes,

The loan waiver announced in February 2008 had a cut-off date of December 2007. The general elections were held about 18 months later. It seems likely that farmers are now anticipating that the next election will be held sometime in the middle of 2014; so it is a good time to begin defaulting.

The Mint report points to a working paper by Martin Kanz (see presentation here) which examined the impact of the 2008 farm loan waiver and found that "debt relief does little to improve the fi nancial position of benefi ciary households" but has strong eff ects on expectations of the beneficiaries. About the material impact of debt relief, he writes,

"Debt relief does not lead to a measurable increase in investment, an improvement in the productivity or a reduction in the variance of realized returns to agricultural investment among households that had their debt cleared under the program."

About its impact on shaping expectations, he writes,

"Households in the treatment group state that they would be much more likely to default on cooperative bank loans in the future, and this propensity is increasing in the amount of debt relief they received. Similarly, recipients of full debt relief are signi cantly less concerned about the reputational consequences of defaulting on bank debt, which suggests that debt relief removes much of the social stigma associated with nancial distress...

the finding that households that had a higher total amount of debt cleared report that they would be more likely to default on cooperative bank debt in the future appears to con firm fears that debt relief is detrimental to the culture of prudent borrowing."