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Abstract

Most large-scale millers in the Kumasi area, central Ghana, provide interest-free or low interest loans to farmers under the agreement that the farmers will bring their paddy to the millers. This paper examines the effect of this interlinkage on the efficiency of rice milling. A quadratic short-run cost function was estimated by controlling for self-selection bias using the results of first-stage Probit regression, and capacity utilization was calculated in relation to money lending. The results show that if a miller provides a loan to farmers, the operating rate will increase by 24% and the total cost will decrease by 17%.

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