In a new world where common prosperity is as important as corporate profits, can private businesses really do well by doing good?

One way to do so is for businesses to partner with governments in helping the poor realize benefits of newly built infrastructure. But three things need to happen for such partnerships to thrive:

First, governments have to be convinced that the private sector can indeed be a good partner – that the latter can recognize opportunities and step in when productivity improves as a result of new infrastructure.

To understand whether this is true, we examine the response of private bank financing to a rural infrastructure program in India, which brought road access to unconnected villages. The program prioritized roads for villages above specific population thresholds, say, 500. This allows us to compare lending in two very similar villages – say, one with population 480 and another with population 520 – only one of which has a road. We find large financing responses to roads using detailed data from a large bank -- 75% more villagers get loans, and the average amount lent to them is about 30-35% higher-- for villages just above the threshold compared to those below. This shows that private banks do recognize opportunities brought forth by new roads.

Second, it has to make sense for private businesses to do so; that is, there still has to be room for some profits in the process of doing good. We show using our rural Indian banking data that this is possible – lending in newly connected villages is subject to similar interest rates, maturities and default behavior as it is elsewhere.

Third, government concerns need to be addressed that allowing private sector participation is not going to make existing levels of inequality even worse. In our context, that would imply that private banks not only lend to the rural rich in connected villages, but they also give loans to the poor who may not have had access to formal credit before, but now have good uses for loans. We find that inequality is not worsened by private lending – if anything, more loans go to landless laborers than to the landed rich in villages with new roads.

Overall, our paper shows that private sector banks can indeed do well for themselves while simultaneously allowing the rural poor to take advantage of new roads.