Paper

Self-Selection into Credit Markets: Evidence from Agriculture in Mali

Evaluating the effects of capital constraints on farmers in Mali

This paper investigates whether capital constraints are binding constraints for farmers in Mali, and if farmers with higher marginal returns to investment are those most likely to borrow. It is based on an experiment that offered some farmers in ‘loan villages’ access to loans and other farmers in ‘no-loan’ villages cash grants. In the no‐loan villages, selected households received grants worth USD 140 and in loan villages only a random subset of households who decided to take loans were provided similar grants. Investments and profits made by these households over time were then observed. Key findings include:

  • Capital constraints are a binding constraint for some farmers in Southern Mali;
  • Cash grants in no‐loan villages led to a significant increase in investments in cultivation and profits, while in loan villages households given grants did not earn any higher profits than households not provided grants;
  • Agricultural lending with balloon payments is a plausible way to increase investments in agriculture;
  • Returns to capital in cultivation are heterogeneous and higher marginal‐return farmers self‐select into borrowing more than low marginal‐return farmers;
  • Agricultural lending processes generate positive self‐selection so farmers who benefit the most from relaxing capital constraints are more likely to choose to borrow.

About this Publication

By Beaman, L., Karlan, D., Thuysbaert, B. , Udry, C.
Published