The Welfare Analysis Of Liberalizing Interest Rate

All along, in order to support rural development, the Government of the rural financial institutions has taken stringent control of interest rates to try to through the limited interest rates to reduce agricultural production costs. However, any price policy is likely to lead to distortions in the allocation of resources, so scarce resources cannot be fully utilized and resulting in efficiency losses, there is no exception. Moreover, the limited interest rates will inevitably affect the number of loans; if farmers can really benefit from it becomes a problem worthy of study.Interest rates reform may bring increase in the number of formal credit supply, but at the same time, farmers have increased the interest burden. If interest rates reform has brought a net loss of economic welfare of farmers, then, the reform will inevitably be called in question and criticism because of efficiency issues. However, if the number of loans increased is greater than the benefits of interest burdens, then, that interest rates reform is efficient. Therefore, if interest rates reform can improve the economic welfare of farmers, if there are some regional differences, and which factors will influence the economic welfare of farmers, there are specific issues of this paper.This study does not discuss whether farmers will take obtained loans to future expansion of production and whether farmers will obtain more welfare from the expansion of production. This study focused on farmer loans, to take farmers'loans as a special commodity to simply measure the number of supply and demand by the increased commodity prices, and to measure the changes in consumer surplus (household economic welfare) by changes in supply and demand. We take farmers welfare as the standard if government should liberalize interest rates, and we are in a new perspective of liberalizing interest rates. This article focuses on changes in its own equilibrium of quantity and price changes of interest rates reform, especially changes in the economic welfare of farmers. A household loan as a special commodity, its producer surplus is the difference between proceeds (interest rates) and cost. If the household loan demand remains unchanged, the result of increase in interest rates and in the number of loans is always that the producer surplus increases. Therefore, this paper does not discuss changes in producer surplus. Consumer loans are generally used in produced investment or consumption, so the economic meaning of consumer surplus is the difference between consumer's willingness to pay to achieve loans and its actually paid prices (interest rates).Clearly, farmers'economic welfare depends on changes in loan demand and interest rates. The differences of regional financial environment, the credit institution's behavior and farmers'demand result in changes of farmers'economic welfare in the three provinces. Thus, to clarify the impact of credit institutions'supply behavior and household's demand behavior to analyze changes in regional welfare is of great significance,based on the empirical study of rural credit cooperatives in Gansu. Henan and Jiangsu in China and applying contingent valuation method (CVM) with farm household data, this article discusses the impact of liberalizing interest rate on farmer's welfare, and the difference among the three provinces. The results show that if interest rates are liberalized for rural credit cooperatives to charge opportunity costs in lending to farmers, the welfare to farmers will differ significantly among the three provinces:it is positive in Gansu and Henan while negative in Jiangsu. As not every farmer would benefit from liberalizing interest rates, the approach to reform rural financial institutions should be consistent with local conditions if the policy objective is improving farmer's welfare. It is more meaningful to discuss liberalizing interest rate in conjunction with regional characteristics and rural financial institutions' service radius.This paper is divided into nine parts, and the main statements are as follows:Research I:distribution of rural credit cooperatives behaviorOver the entire sample, we accord to specific definitions of rural households to identify farmer's valid credit demand. If some farmers who have a valid credit is actually received loans of rural credit, which is a measure to rural credit cooperatives'behavior. The empirical results show that:farmers'knowledge of rural credit cooperatives, farmer's social relations, and farmer's value of property are affecting rural credit cooperative's behavior with statistical significance. Regional dummy variable regression coefficients are significantly negative, which indicates that farmers in Henan and Gansu Province are more difficult than Jiangsu province to obtain loans from rural credit cooperatives.Researchâ…¡:Behavior of household demand.Using valuation method(CVM) in Jiangsu, Henan and Gansu, we provided rural credit cooperative's loan terms to obtain farmer's willingness to pay(WTP) to measure farmer's demand behavior, and analysis its influencing factors. The empirical results show that: farmers'knowledge of rural credit cooperatives, farmer's family medical expenses, and farmer's expenditure on production and operation are affecting farmers'willingness to pay for rural credit cooperative'loan with statistical significance. Regional dummy variable regression coefficients are negative, which indicates that farmer's willingness to pay in Henan and Gansu Province are lower than Jiangsu province.To compare Researchâ… with Researchâ…¡, there is the reason of imbalanced rural financial market. Researchâ… indicates that the main factor influences rural credit cooperatives grant loans to farmers is farmer's house value. But Researchâ…¡indicates that the main factor influences farmer's willingness to pay for achieving loans is farmer's expenditure for medical and production. However, farmers having higher house value may not be farmers having a higher demand, which is perhaps one of the reasons of rural financial market'imbalance.The risk of supplying loans reflecting in farmer's solvency is reflected in the rate of return on investment. Liberalizing interest rates maybe improve rural financial market's imbalance. If it is possible in all places needs further study.researchâ…¢:The welfare measure of liberalizing interest ratesDichotomous choice with open-ended followed up contingent Valuation Method (CVM) is applied to household survey data on willingness-to-pay (WTP) collected for rural credit cooperatives'loan in the three provinces to measure the welfare change. The empirical results show that:the welfare to farmers differ significantly among the three provinces. It is positive in Gansu and Henan while negative in Jiangsu. Not every farmer will benefit from liberalizing interest rates.