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Abstract
We examine whether returns to capital are higher for farmers who borrow than for those who
do not, a direct implication of many credit market models. We measure the difference in
returns through a two‐stage loan and grant experiment. We find large positive investment
responses and returns to grants for a random (representative) sample of farmers, showing that
liquidity constraints bind. However, we find zero returns to grants for a sample of farmers who
endogenously did not borrow. Thus we find important heterogeneity, even conditional on a
wide range of observed characteristics, which has critical implications for theory and policy.