Off-farm Income, Credit Constraints, and Farm Investment

Nigel Key

doi:10.1017/aae.2020.25

Abstract

AbstractMany farmers face borrowing limits that depend on their household income and net worth. Given such credit constraints, an increase in off-farm income should allow farmers to borrow more, thus influencing production decisions and productivity. To test this hypothesis, the education level of the farm operator’s spouse is used to identify exogenous variation in off-farm income. Findings indicate that higher off-farm income leads to more borrowing, capital expenditures, capital input intensity, farm labor use, output, farm income, and productivity. Results suggest that Federal programs that promote access to credit for limited-resource farmers may increase farm investment and productivity.

Highlights

Surveys have shown that farmers consider access to sufficient capital as one of their biggest hurdles to starting and growing a farm business (Lusher-Shute, 2011)
This study estimated the effects of a change in offfarm income on borrowing, farm decisions, and economic performance
The estimated effects of an increase in off-farm income are consistent with predictions from a household model where producers face a binding credit constraint

Summary

Introduction

Surveys have shown that farmers consider access to sufficient capital as one of their biggest hurdles to starting and growing a farm business (Lusher-Shute, 2011). While an exogenous increase in off-farm income should lead, in theory, to greater borrowing and investment given imperfect credit markets, the relationship between the off-farm labor supply and borrowing or investment is ambiguous (Ahituv and Kimhi, 2006; Goodwin and Mishra, 2004; Lien, Kumbhaker, and Hardaker, 2010). We use the educational attainment of the operator’s spouse to identify an exogenous source of variation in off-farm income: spouses with more education will tend to earn higher off-farm wages. We sever the link between the off-farm wage rate and farm labor use by only considering households where the spouse does not work on the farm For these farms, variation in the spouse’s educational attainment should affect the spouse’s off-farm wage, but should not, as we show in the paper, directly affect on-farm labor use or borrowing, investment, or other farm-related decisions. The results are consistent with the existence of credit rationing and suggest that government programs to increase access to loans for credit-rationed farmers could enhance economic efficiency in the agricultural sector

Empirical Approach

Results

IV Regressions

Effects by Operator and Farm Subgroups

Conclusion