The Equity Impacts of Targeted Smallholder Agricultural Credit

Published on: 2017-03-03


The Equity Impacts of Targeted Smallholder Agricultural Credit

HKUST IEMS Working Paper No. 2017-41


We examine the distributive impacts of two alternative approaches to deliver agricultural credit to smallholders: TRAIL (or trader-agent intermediated lending), where local traders recommend village residents for individual liability micro-leans, and GBL (or group-based lending), where households self-select into groups and receive joint liability loans. We use data from a field experiment in eastern India to estimate how the effects of these schemes differ by economic (proxied by landownership) and social (proxied by caste and religion) status of households. Our method accounts for endogenous selection frequencies in each group and the treatment effects on farm income conditional on selection, to estimate the impacts of each scheme on Atkinson-based measures of welfare and inequality. We find that TRAIL loans increased farm incomes for all land groups, but particularly for landless households. As a result, across land groups, the TRAIL scheme generated significantly greater welfare than the GBL scheme, irrespective of inequality aversion. The GBL scheme generated larger effects among the socially disadvantaged minority groups. This suggests that the efficiency and equity implications of the two schemes might be different depending on how we partition households.

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