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Endogenous emergence of credit markets: Contracting in response to a new technology in Ghana

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  • Deb, Rahul
  • Suri, Tavneet

Abstract

Access to credit is important for the productivity and overall welfare of farmers in developing countries. We present a theoretical framework which shows that a change in the mode of shipping (from air to sea) in the Ghanaian pineapple industry made it profitable for pineapple exporters to provide myopic farmers with both in-kind loans (to improve productivity) and cash loans (for consumption smoothing) despite being unable to monitor farmers or enforce repayment. The innovative theoretical result is that providing farmers with additional cash loans can enforce greater input use without compromising repayment. We provide evidence in the form of a case study documenting the dramatic rise of informal credit (through contract farming) after the switch to sea-freight between 1996 and 2001. Using this anecdote, we argue that credit arrangements can arise spontaneously, absent non-market interventions to meet market needs even in the absence of proper legal protections for creditors.

Suggested Citation

  • Deb, Rahul & Suri, Tavneet, 2013. "Endogenous emergence of credit markets: Contracting in response to a new technology in Ghana," Journal of Development Economics, Elsevier, vol. 101(C), pages 268-283.
  • Handle: RePEc:eee:deveco:v:101:y:2013:i:c:p:268-283
    DOI: 10.1016/j.jdeveco.2012.11.006
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    3. repec:eee:jfpoli:v:74:y:2018:i:c:p:9-22 is not listed on IDEAS
    4. Ragasa, Catherine & Lambrecht, Isabel & Kufoalor, Doreen S., 2018. "Limitations of Contract Farming as a Pro-poor Strategy: The Case of Maize Outgrower Schemes in Upper West Ghana," World Development, Elsevier, vol. 102(C), pages 30-56.
    5. Casaburi, Lorenzo & Macchiavello, Rocco, 2015. "Firm and Market Response to Saving Constraints: Evidence from the Kenyan Dairy Industry," CEPR Discussion Papers 10952, C.E.P.R. Discussion Papers.
    6. Casaburi, Lorenzo & Macchiavello, Rocco, 2017. "Firm and Market Response to Saving Constraints: Evidence from the Kenyan Dairy Industry," CAGE Online Working Paper Series 322, Competitive Advantage in the Global Economy (CAGE).

    More about this item

    Keywords

    Africa; Ghana; Contract farming; Informal credit; Interlinked contracts; Technology; Institutions;

    JEL classification:

    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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