Working Paper: CEPR ID: DP14178
Authors: Nikolaus Wolf; Marvin Suesse
Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides afree market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
Keywords: microfinance; credit cooperatives; rural transformation; land inequality; Prussia
JEL Codes: G21; N23; O16; Q15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declining agricultural staple prices (Q11) | emergence of credit cooperatives (P13) |
| declining bank lending rates (G21) | emergence of credit cooperatives (P13) |
| low asset sizes (G19) | inhibit spread of credit cooperatives (P13) |
| land inequality (D31) | inhibit spread of credit cooperatives (P13) |
| ethnic heterogeneity (J15) | ambiguous effects on cooperative formation (C72) |
| credit cooperatives (P13) | diversify farm outputs (Q12) |