Risk, Savings and Farm Household Credit Demand Elasticities in Rural China

37 Pages Posted: 8 May 2010

See all articles by Calum G. Turvey

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Date Written: May 5, 2010

Abstract

This paper empirically estimates individual household credit demand elasticities based on 897 farm households surveyed in Shaanxi and Gansu provinces in China in October 2009. We used experimental techniques to extract individual household credit demand functions from which we estimated point demand elasticities. From a theoretical point of view we proposed that as interest rates fell the demand for credit increased in elasticity and this appears to hold in our data. We find a range of elasticities with mean point estimates of about -0.6. We find that a large number, nearly 20% of farm households have nearly perfectly inelastic demands for credit but we also find that nearly 20% have elasticities above -0.75 including some 15% that have elasticities greater than -1.0. We find that previous studies that have argued against credit policies because of the low inelasticity of demand does not generally hold. There is much heterogeneity in credit demand and we would argue that a full spectrum of targeted credit policies be used to address differences across farms.

We provide GLM regressions using Tweedie and linear linked MLE to identify endogenous factors affecting the demand elasticities. We find that the type of agriculture has no bearing on the distribution of elasticities. We find that the coefficient of variation of revenue (standard deviation to expected revenue) has a negative and statistical effect on elasticity as our theory suggests. However we do not find any statistical indication of a relationship between suggested acceptance of risk and the demand elasticity. We find that farms with higher savings rates have more inelastic demands than low savers which suggests that high savings groups substitute savings for credit, while low savings groups view savings and credit as compliments.

We do find that farmers willing to obtain more credit, even at higher interest rates, have a more elastic demand and as expected farmers who would be willing to borrow more if interest rates fell would also have a more elastic demand. Interestingly, we find that the elasticity of demand for credit would be higher for consumption goods rather than for use in agricultural production. We find that current informal or formal indebtedness indicates higher elasticity.

We also find some interesting demographic and cultural indicators of loan demand. Farmers who are older tend to have higher elasticities as do more educated farmers. But this is offset by farmers who have been farming for a long time in what appears to be a statistical contradiction. We find that farmers brought up to avoid debt or simply prefer not to borrow from a bank have lower elasticities. We also find that a favourable opinion of the bank including flexibility in products and services has a positive effect on the elasticity.

We included the control variables in the regressions. In all cases the four controls (county/province, amount of debt, direction of interest rates, and duration) were not statistically different from zero. Of these the duration effect is most interesting. Karlan and Zinman (2008) found a duration effect in their elasticity measures and argued that loans of longer duration were more elastic than those of shorter duration. To examine this effect, we included one, two, and three year loans in our field experiment but find no evidence of a duration elasticity. That is a farmer offered a one year loan is just as likely to have a high or low elasticity than one who is offered a three year loan.

Keywords: Credit demand, credit demand elasticities, duration elasticity agricultural finance, China

JEL Classification: G10, 013, 016

Suggested Citation

Turvey, Calum G., Risk, Savings and Farm Household Credit Demand Elasticities in Rural China (May 5, 2010). Available at SSRN: https://ssrn.com/abstract=1601111 or http://dx.doi.org/10.2139/ssrn.1601111

Calum G. Turvey (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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