The Effects of Access to Credit on Productivity Among Microenterprises: Separating Technological Changes from Changes in Technical Efficiency

TL;DR

Access to credit significantly boosts rice productivity among microenterprises in Bangladesh, mainly through technological improvements, with some efficiency gains, especially for hybrid rice and tenant farmers.

Contribution

This study uniquely decomposes credit's impact into technological change and efficiency, providing detailed insights into productivity improvements in low-income farm microenterprises.

Findings

Credit access increases rice yield by approximately 14%.

Technological change accounts for about 11% of the productivity gain.

Efficiency improvements contribute around 3%, mainly for hybrid rice varieties.

Abstract

Improving productivity among farm microenterprises is important, especially in low-income countries where market imperfections are pervasive and resources are scarce. Relaxing credit constraints can increase the productivity of farmers. Using a field experiment involving microenterprises in Bangladesh, we estimate the impact of access to credit on the overall productivity of rice farmers, and disentangle the total effect into technological change (frontier shift) and technical efficiency changes. We find that relative to the baseline rice output per decimal, access to credit results in, on average, approximately a 14 percent increase in yield, holding all other inputs constant. After decomposing the total effect into the frontier shift and efficiency improvement, we find that, on average, around 11 percent of the increase in output comes from changes in technology, or frontier shift, while the remaining 3 percent is attributed to improvements in technical efficiency. The efficiency gain is higher for modern hybrid rice varieties, and almost zero for traditional rice varieties. Within the treatment group, the effect is greater among pure tenant and mixed-tenant farm households compared with farmers that only cultivate their own land.