Jointly organized by faculty in Politics, Economics, and the Batten School.
Access to formal credit remains limited in many rural areas, where incomes are highly seasonal and follow agricultural cropping cycles. We develop a model to show that frictions in capital market access distort labor markets, driving up income and consumption inequality and lowering aggregate output. To identify the causal impact of intra-season credit availability on rural markets, we conducted a two-year randomized controlled trial with small scale farmers in rural Zambia. We show that lowering the cost of borrowing at the time of the year when farmers are most constrained (the lean season) results in a reallocation of labor from better-off to worse-off farms. This reallocation of labor reduces differences in the marginal product of labor across farms, increases local wages, and leads to modest increases in agricultural output.