The Influence of Social Capital on Farm Household’s Borrowing Behavior in Rural China

This paper evaluates whether social capital affects the ability of farm households to obtain formal and informal loans. We test for the impact of two measures of social capital. The first measure, kinship, captures the traditional aspects of bonding social capital in rural areas that might affect the probability of getting informal loans. As the economic reforms in China have changed the traditional rural way of life and weakened the role of kinship, more mobile farmers are likely to develop a different kind of social capital also based in the Chinese tradition but not focused exclusively on kin. This friendship social capital is hypothesized to affect farmers’ ability to get both formal and informal loans. We use the Chinese Household Finance Survey data from 2013 and estimate the probability of obtaining credit, while also accounting for the reverse causality. In addition, we use the Heckman selection model to establish how social capital affects not only the probability of getting loans but also the size of the loan. Empirical results suggest that social capital affects borrowing by farm households. In particular, the friendship social capital has a positive effect on farm household’s ability to get formal loans, and has a substitution effect on informal borrowing, while kinship has a positive effect on farm households’ ability to get informal loans. Friendship and kinship are positively associated with the amount of a farm household’s formal and informal loans, respectively