Heterogeneous effects of rural land property mortgage loan program on income

Abstract

Purpose The innovative rural land property right mortgage loan program (RLPRMLP) provides a new channel for farmers to secure borrowing from microfinance institutions. Farmers’ land property right could be used as collateral to deal with moral hazard and adverse selection issues. The purpose of this paper is to document the effects of the RLPRMLP on households’ income using a unique data set from 1,279 households’ survey in Western China during 2012–2014. Design/methodology/approach At the first stage, the authors evaluate the impacts of RLPRMLP on households’ income to get the benchmark results when the authors control household’s observed and unobserved characteristics. To address the potential endogeneity issue resulting from the self-selection of farmers into the rural financial market, the authors apply the treatment effect model to identify the csusal effects of the innovative loan approach on a household’s income. Findings The empirical results favor the belief that participating in the RLPRMLP helps the households improve their total income (at least by 20.2 percent) and income per capita. This income-improving channel is only through agricultural sector, rather than through non-agricultural sector which potentially helps to deal with the inequality issue within poor regions. The results are robust when the authors control households’ characteristics, including observed and unobserved, and solve the endogeneity issue. Participating in the RLPRMLP could encourage farmers to invest more in the agricultural sector and increase agricultural productivity, which is the main mechanism of the income-improving effect of the RLPRMLP. Originality/value The innovative mortgage loan program provides a new channel for farmers to get loan. Land property right reform is being currently applied in rural China. Testing the effectiveness of combining land property right and microfinance loan method is necessary for the government policy making and development of rural areas. The findings are striking. The income improvement mechanism mainly works through agricultural sector, potentially because of the reform of land property, contributing to the increase of marginal product of land, i.e., the increase of agricultural productivity. These could help the development of microfinance theory, and the innovative loan method could be applied to other developing countries.