Farm credit and credit demand elasticities in Shaanxi and Gansu

Abstract

This paper empirically estimates individual household credit demand elasticities based on 897 farm households surveyed in Shaanxi and Gansu provinces in the People's Republic of China (PRC) in October 2009. We used survey-based experimental techniques to extract individual household credit demand functions from which we estimated point demand elasticities. From a theoretical point of view, we proposed that as interest rates fell the demand for credit increased in elasticity, and this appears to hold in our data. We find a range of elasticities with mean point estimates of about −0.6. We find that nearly 20% of farm households have nearly perfectly inelastic demands for credit but we also find that nearly 20% have elasticities above −0.75 including some 15% that have elasticities greater than −1.0. Previous studies that have argued against credit policies because of the low inelasticity of demand do not generally hold. There is much heterogeneity in credit demand and we would argue that a full spectrum of targeted credit policies can be used to address differences across farms.