Selection into Credit Markets: Evidence from Agriculture in Mali

Abstract

We examine whether returns to capital are higher for farmers who borrow than for those who do not, a direct implication of many credit market models.We measure the difference in returns through a two-stage loan and grant experiment.We find large positive investment responses and returns to grants for a random (representative) sample of farmers, showing that liquidity constraints bind.However, we find zero returns to grants for a sample of farmers who endogenously did not borrow.Thus we find important heterogeneity, even conditional on a wide range of observed characteristics, which has critical implications for theory and policy.

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