Credit constraints

Many peasants and farmers lack the resources to fully pay for purchased inputs, such as pesticides and GMVs. They may need to borrow to finance these choices. Farmers' ability to obtain funds, and the price paid for these funds, affect adoption choices. As shown in the Appendix, when the GMV is costly, lack of credit may disallow some farmers from adopting this technology, or may induce them to adopt the generic GMV in cases where it is much cheaper. On the other hand, credit considerations may prevent or limit applications of chemicals and may induce farmers' interest in GMVs. Essentially adoption will suffer if the extra cost of seeds exceeds the extra cost of pesticides use. Adoption of GMVs can be enhanced by subsidization or provision of credit for new seeds, or by removal and restrictions of credit subsidies for pesticide use whenever they exist.

There is significant heterogeneity of credit availability among regions and farmers. Poorer farmers, and those located in regions farther away from financial centers, are more likely to face strict credit constraints. This may slow adoption by these groups of producers in some cases, and enhance it when pesticides are very costly. Comparing the impacts from adoption of GMVs across regions differing in their credit constraints, our analysis suggests that the GMV will have more of a pesticide-saving effect on regions with more lax credit constraints and more yield-increasing effects where the credit constraint is more severe.

3.2 Risk considerations

Farming activities are subject to risk, both in terms of production and market conditions, affecting adoption (Just and Zilberman). Pest infestation is one of the major sources of risks that farmers face. GMVs are forms of insurance against this pest risk. They protect the farmers both from increases in randomness of pests and the associated extra costs of pesticides, as well as the extra damage associated with major infestations. As shown in the Appendix, for a given average level of pest infestation, an increase in the randomness of pest infestations increases pesticide use when farmers are risk averse. Pesticide use increases as risk aversion, variance of damage, output price, and potential output become larger. An increase in the variance of pest infestation will increase the likelihood of adopting GMVs. Since farmers with smaller farms are likely to be more risk averse, risk considerations may lead to more adoption of GMVs by smaller farms.

Potential output may also be a source of risk affecting adoption of a GMV, especially when it is a generic, not a local, variety. Farmers are familiar with the yield distribution of local varieties and have accumulated knowledge on how to address their unique features. The relative lack of knowledge about the management and performance of a generic variety under local conditions increases the subjective yield risk. Just and Zilberman's (1988) analysis suggests that this increase in output risk will reduce pesticide use and the expected gain from adopting the generic GMV. Thus, adoption rates and economic welfare may be improved if prior experimentation and adjustments of production practices are conducted before the introduction of a generic GMV to a region.

Combined risk and credit considerations are likely to have a significant impact on farmers' choices. Failing to repay a loan because of pest damages or low prices may lead to bankruptcy. Farmers are likely to make technology choices that will reduce the likelihood of bankruptcy. For example, high levels of pesticide use will increase farmers' debt and income requirements to avoid bankruptcy, while low pesticide use increases the probability of crop failure. Thus, GMVs are likely to be adopted if they provide the same risk-reducing effect but are relatively lower cost compared to pesticides.

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