Ammon is a PhD Student in Economics at the University of Warwick.
Abstract: In low income countries, credit supplied by trading partners often serves as an important substitute for formal lending. However, there is little systematic evidence on the condition under which such lending can be self-enforcing. I investigate this question by assessing how a permanent change in the outside option 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, taking advantage of 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% decrease in loans. I find evidence supporting 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 at the same time to the profitability of rice cultivation being decreased, which is consistent with the crop choice being affected by tightened credit constraints. Finally, I observe an increase in commercial court cases, possibly indicating a shift from informal to formal contracting.