January 30, 2017
News /
Posted by NCID

On January 27th, Christina Ammon, a PhD Candidate in Economics at the University of Warwick, presented a paper titled: “Trade Credit and Borrower Outside Option- Evidence from Colonial Taiwan.” Her research tries to determine how permanent changes in a crop’s payoff affects the credit supplied by mills in the sugar industry in colonial Taiwan using novel data focusing on the period from 1929 to 1939.

During this period, Taiwan was a Japanese colony. The vast majority of credit to farmers was supplied by mills, which implied a relatively lower default rate as loans were linked to the exchange of goods. This was reinforced as each farmer could only legally sell to one mill. Even then, a mill could always be repaid with sugarcane. Therefore, the only possible way for farmers to default was to change their crops. In other words, this system was only sustainable if farmers valued their business relationships more than any outside option, which in this case was rice. The latter had recently become a cash-crop and its returns grew as Japan instated price floors in 1931 by purchasing excess production. This policy came in response to riots led by rice farmers in mainland Japan due to the plummeting prices.

In order to estimate the spill-over effects of this policy on credit, Christina Ammon takes advantage of the fact that rice can only grow under certain conditions and mills were allocated exclusively to one command area. Hence, treatment would vary across command areas depending on their suitability to properly grow rice.

She concludes that a one standard deviation increase in suitability results in a 18% decrease in loans in the sugarcane market. The paper provides evidence towards the fact that this decrease is supply-driven. That is, since farmers located in areas appropriate for rice crops had higher incentives to default, mills reduced their credit offer, resulting in an increased number of farmers switching from sugarcane to rice production. This in turn, implied lower profitability in the rice sector. Finally, she provides evidence of a shift from informal to formal contracting in areas with higher exposure to a change in rice prices.