Uneven Influence of Credit and Savings Deposits on the Dynamics of Technology Decisions and Poverty Traps

Using numerical approximations of infinite-horizon, dynamic, stochastic models of farm-household behavior, we investigate the influence of several dimensions of financial development in overcoming poverty traps, through the sustained adoption of advanced production technologies. We explore decisions for both adopting and abandoning higher-productivity technologies, under different scenarios of inclusion into the credit and the savings deposits markets, for different levels of credit rationing (limits on loan size), and different degrees of financial deepening.The results show that the influence on technology choices of the inclusion into markets for just loans or just deposits is not uniform. Unless loan-size limits are sufficiently nonrestrictive, deposit facilities are a superior intervention to boost rates of technology adoption and prevent its abandonment. While sustained rates of adoption increase with less non-interest credit rationing (larger loan-size limits), they are insensitive to declining loan interest rates. Thus, in cases of non-interest credit rationing, most likely among the poor, subsidized credit would not encourage adoption. In contrast, adoption rates increase and abandonment rates decline with higher interest rates on deposits. The paper also shows that transitioning from an economy with scant financial development to another with full financial development (namely, reducing the gap between loan and deposit interest rates) increases the sustained adoption of advanced production technologies, from 14 to 62 percent of household-farms, under the parameters of the simulation