Why do households in developing economies remain self-employed in low-productivity activities, such as agriculture, despite substantial expansions in formal credit? In this paper, I find evidence that existing household debt can itself become a financial friction that impedes reallocation of household resources. I study two large agricultural debt-forgiveness programs in India and exploit quasi-random variation in relief eligibility among otherwise similar farming households. Using administrative bank microdata linked to business-registration records, I find that debt relief does not revive borrowing for the indebted farm. Instead, beneficiary households reduce reliance on distant wage employment sustained through temporary internal migration, redirect borrowing toward locally originated personal and small-business credit, and start more formal local non-farm businesses. Districts more exposed to relief also experience greater business formation and economic activity. The results identify existing household debt as a financial friction on occupational choice and show that relieving liabilities can enable households to reallocate labor and capital across activities, supporting structural change within the household.

We study the impact of employee productivity information disclosure on labor reallocation across firms. GitHub, the world’s largest software management platform, publicly tracks individual contributions. A 2016 policy change enhanced user GitHub contribution visibility, leading employees with 1 standard deviation higher contributions to experience a 5.2% increase in mobility to large firms, often at the expense of smaller firms. While top talent from small firms secured senior roles at larger firms, the latter retained them through internal promotions. This shift reduced employment growth and productivity in affected small firms, highlighting how labor-related big data reinforces large firms' dominance.

We ask whether regulatory forbearance on bank loan loss recognition exacerbates agency frictions within borrowing firms. We study the forbearance implemented in India in response to the global financial crisis. Under the forbearance regime, banks were allowed to restructure loans without downgrading such loans and providing for them. Firms more likely to benefit from forbearance experience an increase in the tunneling of resources by the management through increased compensation and related party transactions.  Their investment in shareholder value-destroying unrelated projects increases. Thus, the free put option provided by the regulator by way of forbearance exacerbates agency frictions within borrowing firms.  

In this chapter, we review several key topics that lie at the intersection between labor economics and corporate finance. We discuss well-studied questions in this literature as well as new areas of research that are expanding the field of labor and corporate finance. First, we address the relationship between ownership and employees’ labor outcomes. Second, we present an overview of the literature studying the relationship between capital structure and labor markets, including the implications of financial distress. Third, we connect labor with the fast-growing literature on inequality within firms and investments in technology adoption. A common theme across all these topics is the interdependency between firms and labor, where decisions made by firms impact labor and trends in labor markets  impact firms.

We investigate the role of regulatory forbearance in causing a banking crisis. To mitigate the expected spillover effects of the global financial crisis, the Indian banking regulator allowed banks to restructure loans without creating provisions. The forbearance continued beyond the crisis due to political economy-related considerations. Using heterogeneity in the application of the policy, we find that healthy banks that benefited from forbearance became undercapitalized due to the non-recovery of unhealthy borrowers whose accounts were restructured. The undercapitalization led to distortionary lending practices; some distortions took the form of a quid pro quo between the government and the undercapitalized banks. 

Although the literature has studied the impact of social ties on credit markets, the possibility of social relations causing contagion remains unexplored. We study the Indian caste system and the group loan structure, where members screen and monitor each other. Using loan-month level data provided by a non-banking lender, we find that shocks take the form of a loan default contagion within local caste networks, plausibly due to pre-existing economic linkages. Several robustness tests rule out delayed propagation of shocks being mischaracterized as a contagion. Thus, we highlight a dark side of social ties in credit markets.