Selection Into Credit Markets: Evidence From Agriculture in Mali

Abstract

We use a two‐stage experiment on agricultural lending in Mali to test whether selection into lending is predictive of heterogeneous returns to capital. Understanding this heterogeneity, and the selection process which reveals it, is critical for guiding modeling of credit markets in developing countries, as well as for policy. We find such heterogeneity: returns to capital are higher for farmers who borrow than for those who do not. In our first stage, we offer loans in some villages and not others. In the second stage, we provide cash grants to a random subset of all farmers in villages where no loans were offered, and to a random subset of the farmers who do not borrow in villages where loans were offered. We estimate seasonal returns to the grant of 130% for would‐be borrowers, whereas we find returns near zero for the sample representative of non‐borrowers. We also provide evidence that there are some farmers—particularly those that are poor at baseline—that have high returns but do not receive a loan.

Adapting to Climate Risk With Guaranteed Credit: Evidence From Bangladesh

“…This paper joins an active literature documenting how introducing additional flexibility to credit schemes can improve outcomes. Field and Pande (2010), Field, Pande, Papp, and Rigol (2013), and Beaman, Karlan, Thuysbaert, and Udry (2023 showed that delaying the start of repayment installments, reducing payment frequency, and allowing lump-sum repayments post-harvest reduces borrower transaction costs, and boosts investments and profits. More recently, Battaglia, Gulesci, and Madestam (2023) and Barboni and Agarwal (2022) showed that allowing borrowers to delay repayments improves business outcomes without harming repayment rates; while Aragón, Karaivanov, and Krishnaswamy (2020) showed that a fully flexible credit line improves small business profits by allowing borrowers to quickly respond to changes in the market.…”