Contestable Credit Markets and Household Welfare: Panel Data Evidence from Ethiopia

Abstract

This paper explores the impact of credit constraints on household welfare in Ethiopia. We use a three-wave panel dataset for rural and small-town households to estimate the effects of household borrowing constraints on two alternative indicators of household welfare: consumption expenditure and asset ownership. The presence of a constraint is treated as an endogenous regressor, using an instrumental variable based on Baumol’s theory of contestable markets. We find that credit constraints have a significantly negative effect on both outcomes. These results are robust to several alternative specifications of the model.