Abstract

This study investigates the impact of public agricultural credit on factor misallocation and productivity, addressing a gap in the literature on capital market distortions in developing countries. While existing research emphasizes land market imperfections, little is known about the role of credit in shaping input allocation and output. The analysis applies a calibrated equilibrium model and causal inference methods using nationally representative agricultural census microdata. Findings show that access to credit reduces the efficiency gap by up to 26 %, mainly by alleviating capital market distortions. Effects are stronger among farms with lower productivity and increase when land market frictions are removed. The results highlight the structural importance of credit in improving allocative efficiency and reveal heterogeneity in policy impact across the productivity distribution. Evidence suggests that credit interventions are more effective when land market institutions are functional, underscoring the need for integrated policy design to enhance productivity in rural economies. © 2025 Elsevier B.V.