Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms
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Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms Meghna Dutta1 · Niladri Sekhar Dhar2
© The Indian Econometric Society 2020
Abstract Evidence suggests that the unorganised manufacturing units are extremely credit starved. The unavailability of credit for such firms could be a direct result of lack of documentation of property rights which in turn renders the assets of the firm non-collateralizable. The absence of this essential representation of assets, which includes machinery, building, even the land on which the firm is set up, leads to problems of moral hazard, giving rise to asymmetry in information thereby restricting the usability of physical assets in generating capital. We attempt to study the nature and extent of impact that absence of property rights has on the credit availability of informal firms in India and found improper documentation of property rights results in significant credit crunch for the unorganised production units. We also observed that under such constraint the small informal firms tend to work as outsourced units for other firms thereby leading to intra-country production reorganization. Keywords Credit constraint · Property rights · Outsourcing · Informal sector · India JEL Classification E26 · D29 · L6
Introduction In most developing countries, by structure, there exists a huge unorganized sector contributing significantly to the economy in terms of its share in employment, value added and export earnings. The contribution of the informal sector in these * Meghna Dutta [email protected] Niladri Sekhar Dhar [email protected] 1
Indian Institute of Technology, Patna, Bihta, Patna 801103, India
2
Asian Development Research Institute, ADRI, BSIDC Colony, Off Boring Patliputra Road, Patna 800 013, India
13
Vol.:(0123456789)
Journal of Quantitative Economics
economies becomes even more significant in light of the now dominant view that the sector comprises of mostly firms that are too unproductive and is a survival strategy for low key individuals (Levy 2008; Hsieh and Klenow 2009). In contrast, studies as De Soto (1989) considered this sector to be a reservoir of potentially productive firms constrained by burdensome entry regulations which distorts firms’ decision along important margins as size of the labour force. The two seemingly opposing views leave open the question whether a legal representation of these firms’ asset base will increase their productivity thereby changing their status from being marginalized actors to central actors in economic growth. Therefore, it is imperative to study the process of production in this sector and identify the hindrances therein which then becomes important questions for economic development. In attempting to assess the functioning of this sector, in this study, we observe another paradigm— that of absence of property rights as a cause for credit constraint, and present empirical evidence from a cross-industry study of Indian informal firms to substantiate that impr
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