Impact of Credit Constraints on Agricultural Productivity in the face of Climate Variability: Panel Data Evidence from Rural Ethiopia

Increasing agricultural productivity is a major step towards transforming the rural economy and ensuring food security. This paper uses household level panel data linked with climate data to examine the impact of different credit constraint conditions on agricultural productivity under changing climatic conditions. A propensity score matching (PSM) and a difference-in-differences (diff-in-diff) methods were employed to provide unbiased estimates of the production impacts of credit constraints on crop productivity. After controlling for potential selection bias, it found that relaxing credit constraints increases agricultural productivity by Ethiopian Birr 169 per hectare, while the real crop revenue for discouraged and quantity constrained farmers declined by Ethiopian Birr 443 and 275 per hectare respectively. These results suggest that relaxing credit constraints by improving performance of the rural credit market could significantly increase agricultural productivity in rural Ethiopia.