Credit and risk in rural developing economies

This paper examines the theory of credit as a means of raising the productivity and living standards of producer households who face significant uncertainty. A dynamic model with uncertainty is developed in which households choose how much to invest in a yield-enhancing technology, how much to consu...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2006-04, Vol.30 (4), p.541-568
Main Author: Osborne, Theresa
Format: Article
Language:English
Subjects:
Agricultural development
Borrowing constraints
Consumer credit
Credit
Economic models
Financial planning
Human capital investment
Investment policy
Precautionary savings
Productivity
Risk
Rural areas
Standard of living
Studies
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Summary:This paper examines the theory of credit as a means of raising the productivity and living standards of producer households who face significant uncertainty. A dynamic model with uncertainty is developed in which households choose how much to invest in a yield-enhancing technology, how much to consume, and how much to save. I find that while credit has important short and medium run benefits for productivity, consumption, and lifetime utility, these benefits are not sustained in the long run. Indeed, under reasonable parameter settings, mean consumption will fall. In contrast, the paper shows that risk mitigation has sustained benefits for productivity, lifetime utility, and equality.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2005.01.002