The Role of Credit and Deposits in the Dynamics of Technology Decisions and Poverty Traps

This paper investigates the farm-household decisions of adopting and abandoning higher-productivity technologies, under different scenarios of inclusion into the credit and deposit markets. The financial environment is further characterized by shallow financial markets, represented by a comparatively large wedge between high interest rates charged on loans and low interest rates paid on deposits and by relatively stringent borrowing limits. Via the numerical approximation of infinite horizon, dynamic, stochastic models, the analysis begins by solving the representative farmer’s dynamic decision problem for three different scenarios of financial exclusion/inclusion in just loan or deposit markets. Then, by expanding the model to a whole economy of heterogeneous farmers, the effects of financial development are examined at the aggregate level. The results show that the scenarios of partial inclusion, either to deposits or to credit markets, bring notably greater benefits in terms of the sustained adoption of the advanced technology than the scenario of financial exclusion. Simulations using different borrowing limits show that, unless the credit limit is sufficiently nonrestrictive, the provision of deposit facilities is a superior policy to boost the rates of technology adoption and prevent its abandonment. In the case of credit, the steady-state adoption rates are insensitive to the interest rate levels. Thus, the simulations actually reflect cases of non-interest credit rationing. In contrast, when only deposit facilities are available, the adoption rate is higher and the abandonment rate is lower as the interest rates paid on financial savings increase.