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Microfinance institutions world-wide are continuously developing strategies for addressing credit market failure among liquidity constrained households. While an enormous amount of research has provided evidence for the positive welfare impact of access to credit at household level, very little is known regarding
the extent to which credit can be used as a tool for enhancing separation in the making of consumption and production decisions at household level, which is an important precondition for specialization.
This study investigates the extent to which access to credit relaxes liquidity constraints and leads to separation in household decision making. As a test of the reliability of self-reported credit constraints we estimated the probability that:
(a) a household will face credit constraints and
(b) tested for separation in the constrained and
(c) unconstrained regimes using a on-farm labor demand model.
Results indicated that, consistent with theory, household demographic characteristics have a significant effect on labor demand among households facing credit constraints while they have no effect on labor demand in the unconstrained regime. Although the lack of separation in credit-constrained households could be a result of
other market failures, such as imperfect labor markets, results in the current study appear to suggest that credit constraints are responsible for the lack of separability in the constrained regime.
The implication from the study is that increased access to credit can be an important tool for arresting current market failures faced by poor rural households to the extent that once liquidity constraints are relaxed households can hire extra labor to enhance their productivity. |
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