The hazards of piecemeal reform: British civil courts and the credit market in colonial India

The colonial experience of developing countries provides valuable evidence regarding the impact of legal and institutional innovations on economic gro wth. However, there has been little effort by economists to study colonial policies to gain theoretical insights into the process of institutional ref orm. This paper considers the introduction of civil courts in colonial Indi a and its impact on agricultural credit markets in the Bombay Deccan. Drawi ng on historical records and a formal analysis of the credit market, the pa per finds that the reform led to increased competition among lenders. Ex an te, we expect that this would have raised farmers' welfare. But increased c ompetition also reduced lenders' incentives to subsidize farmers' investmen ts in times of crisis, leaving them more vulnerable in bad times. (C) 1999 Elsevier Science B.V. All rights reserved.