Are poor able to access the informal credit market? Evidence from rural households in China

- The poor are often excluded from formal credit markets, but few empirical study has investigated whether they are constrained in the informal market.
- This paper uses recent micro data of rural China. An instrumental variable model is estimated to account for potential endogeneity issues. Results show that poorer households have lower probability to enter the informal credit market.
- The poor are limited by social network and that they have no financial means to invest in their social capital to expand their social network.
- Our findings shed lights on potential solutions of reducing poverty in rural areas.

The poor are often excluded from formal credit markets, but few empirical studies in literature have investigated whether the poor are constrained in the informal credit market. This paper uses recent micro data of rural China to answer this question. An instrumental variable model is estimated to account for potential endogeneity issues. Results show that poorer households have lower probability of entering the informal credit market. Further examination shows that the poor are limited by social network and that they have no financial means to invest in their social capital to expand their social network. Our findings shed light on potential solutions of reducing poverty in rural areas.