Abstract
This paper evaluates whether social capital affects the ability of farm households to obtain formal and informal loans. We test for the impact of two measures of social capital. The first measure, kinship, captures the traditional aspects of bonding social capital in rural areas that might affect the probability of getting informal loans. As the economic reforms in China have changed the traditional rural way of life and weakened the role of kinship, more mobile farmers are likely to develop a different kind of social capital also based in the Chinese tradition but not focused exclusively on kin. This friendship social capital is hypothesized to affect farmers’ ability to get both formal and informal loans. We use the Chinese Household Finance Survey data from 2013 and estimate the probability of obtaining credit, while also accounting for the reverse causality. In addition, we use the Heckman selection model to establish how social capital affects not only the probability of getting loans but also the size of the loan. Empirical results suggest that social capital affects borrowing by farm households. In particular, the friendship social capital has a positive effect on farm household’s ability to get formal loans, and has a substitution effect on informal borrowing, while kinship has a positive effect on farm households’ ability to get informal loans. Friendship and kinship are positively associated with the amount of a farm household’s formal and informal loans, respectively.
Highlights
Finance is at the core of economic activities and rural finance is an important force for agricultural development, rural economic growth, and farmer income growth
The results show that the social capital variables—friendship and kinship—are positively associated with the probability of having a formal loan, as indicated by values on their coefficients that are very similar to the previous regressions
Based on the micro-data from the Chinese Household Finance Survey for 2013 (CHFS2013), we analyze the impact of different components of social capital on a farm household’s formal and informal borrowing
Summary
Finance is at the core of economic activities and rural finance is an important force for agricultural development, rural economic growth, and farmer income growth. Heterogeneous farm households likely have different needs that can be met by informal and, to a lesser extent, formal finance that play different roles in the rural financial market. Kinship, which takes advantage of reputation and trust mechanisms in a rural society, is the main type of social capital for a farm household. The introduction of the farm household contract responsibility system permitted exchange of land management rights which, in turn, allowed rural residents to benefit from their comparative advantages by leaving the countryside in pursuit of better incomes. These transitions have contributed to the breaking down in the Chinese rural traditional social structure [16]. With the movement of farmers, the dominant role of social capital determined by blood and geography is being replaced by a new type of social capital—friendship
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