Aid on Spreadsheets

Credit Constraints and Capital Misallocation in Agriculture: Theory and Evidence from Uganda

In less-developed economies, agriculture employs a large share of the labor force and is responsible for a significant fraction of output, yet is typically characterized by low productivity. A major contributor to low productivity appears to be under investment in productive capital, such as quality tools, fertilizer and land improvements. A leading explanation is that poor farmers are ‘credit constrained,’ meaning that they simply cannot access sufficient cash to make the necessary investments. Policymakers frequently therefore subsidize such inputs, yet it is far from clear whether such subsidies are effective at putting resources in the hands of the right farmers. Subsidies may enable skilled but poor farmers to increase their usage of productive capital, but they may simply subsidize farmers who would have invested anyway, or even lead unskilled farmers to inefficiently take up the now artificially cheap capital. We propose a randomized controlled trial in Uganda, in partnership with the large, global NGO, BRAC, to study these issues. The study will provide small-scale farmers with access to agricultural capital at varying subsidy levels, combined with a) careful measurement of farmers’ willingness to pay for capital, and b) a randomized cash transfer program to study the effect of easing farmers’ credit constraints. Our experiment is designed to generate high-quality experimental evidence on farmers’ returns to capital (evidence which is presently scarce) which will enable us to explore to what extent there are indeed high potential returns that farmers are missing out on. Our experiment also enables us to study in detail how two leading policies, price subsidies and cash transfers, affect capital investment and productivity. This will enable us to offer precise and well informed policy recommendations. Our work will contribute to two important recent literatures in development economics. The first studies the return to investment in small scale enterprises in developing countries, typically finding high unexploited potential returns to capital. The second seeks to understand the ideal pricing policies for distributing development programs, so far mostly considering health products such as anti-mosquito bednets. We will provide new evidence from agriculture, complementing the existing work. We also make an important methodological contribution, combining and improving on existing experimental designs to provide rich new information to policymakers trying to maximize the impact of scarce public resources.

Project ID

SE-0-29-2015-03426-285-43082

Activity status

2 - Implementation

Aid type

D02 - Other technical assistance

% to Uganda

100.00

Organisations

Funding

Sweden

Implementing

Stockholms universitet

Extending

None

CRS code	%
Research/scientific institutions (43082)	100.0