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Christina Ammon - Research Summary

Paris School of Economics

Trade Credit and Market Structure: Evidence from Colonial Taiwan

In low income countries, credit supplied by trading partners often serves as an important substitute for formal lending. However, there is little systematic evidence about the role played by the market structure. The degree of monopoly power of the credit provider might negatively impact her incentives to offer such costly services. However, it might also decrease the incentives for strategic default, implying that lending becomes self-enforcing. I investigate this trade-off by assessing how a permanent change in the outside opportunities of farmers affects the credit supplied by downstream buyers (mills) in the sugar industry in colonial Taiwan (1895-1945) after the implementation of a policy that caused a permanent increase in the main alternative cash-crop, rice. Using novel historic data, I implement a difference-in-difference strategy, exploiting the fact that mills were allocated exclusive command areas, which varied in their suitability for rice cultivation. Thus, the treatment intensity of the policy varies across mills. Results indicate that a one standard deviation increase in my measure of suitability is associated with a 18 percent decrease in loans. I find evidence to support the hypothesis that this decrease is linked to farmers' increased incentives to default. Further, higher exposure to the policy simultaneously leads to an increased number of farmers switching from sugarcane to rice and a decrease in the profitability of rice, which is consistent with the crop choice being affected by tightened credit constraints.

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