Experience of communal conflicts and intergroup lending

Fisman, R, Sarkar, A, Skrastins, J and Vig, V (2020) Experience of communal conflicts and intergroup lending. Journal of Political Economy, 128 (9). ISSN 0022-3808

Abstract

We provide microeconomic evidence on ethnic frictions and market efficiency, using dyadic data on managers and borrowers from a large Indian bank. We conjecture that, if exposure to religion-based communal violence intensifies intergroup animosity, riot exposure will lead to lending decisions that are more sensitive to a borrower’s religion. We find that riot-exposed Hindu branch managers lend relatively less to Muslim borrowers and that these loans are less likely to default, consistent with riot exposure exacerbating taste-based discrimination. This bias is persistent across a bank officer’s tenure, suggesting that the economic costs of ethnic conflict are long-lasting, potentially spanning across generations.