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Abstract
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.