Credit Demand Under Ambiguity Aversion Among Agricultural Households

Rural economic development has been one of the fundamental problems faced bythe Chinese government, and the financial markets are often considered to play animportant role in supporting economic development. However, the present ruralfinancial market is so incomplete and immature that it is satisfy the needs of ruraleconomic development. Meanwhile, Agricultural production uncertainty consist ofnatural disaster risk, market risk, management risk, technology risk, and so on,agricultural production is characterized by high risk. Risk influences the production,consumption, credit, and the labor supply, is one of the key factors which affect thedevelopment of the rural financial market. The author attempts to investigate themechanism that how the risk affects the demand of the rural financial market in order toprovide foundation for the future scholars to explore the impact on rural financialmarket risks from both the demand and supply side, and provide theoretic and practiceinvestigation for the reform of current rural financial market.Previous literature tend to focus on the randomness characteristics of risk, but ignorethe ambiguity characteristics of risk. However, first of all, the theoretical literaturedemonstrates the decision makers not only depend on the risk characteristics ofrandomness but also the risk characteristics of ambiguity; secondly, the agriculturalhouseholds tent to face ambiguity. They cannot fully understand or depict the uncertainsituation that they face; Finally, the logic of the preference of ambiguity aversion fit theactual decision-making behavior logic. The logic of ambiguity aversion is maxminstrategy, assume the decision maker weigh the average and the worst case situation ofthe future situation, which is more fitting than risk aversion. Therefore, this articleattempts to build the decision making model under ambiguity aversion containingrandomness and ambiguity characteristics of uncertainty.Through theoretical analysis and empirical research, the paper investigate themechanism that how the agricultural household decide the credit demand. Upon this, thearticle examine the mechanism that how risk, agricultural prices, interest rates, totalfactor productivity, capital-output elasticity, risk aversion, risk level, ambiguityaversion, initial wealth endowments, the initial capital amount, and the worst-caseexpected output affect the credit demand of the agricultural households. Sixconclusionsare concluded as follows. First of all, upon on the agricultural household model, thearticle describes the system how the agricultural household decide to borrow.Specifically, the optimal consumption satisfies that the marginal rate of substitution ofconsumption is equal to the ratio of consumer prices, and the optimal investmentsatisfies the expected marginal revenue of capital equals to the marginal cost of borrowing, after determining the optimal consumption and investment, the optimalamount of credit demand is determined; Secondly, based on the decision-makingmechanism of agricultural household credit demand, the article investigate themechanism of how price, market interest rates, total factor productivity, capital-outputelasticity, risk aversion, risk, ambiguity aversion, initial wealth endowments, the initialamount of capital, the worst expected output affect the credit demand of agriculturalhouseholds. Thirdly, based on the Shanghai household survey data, the articleinvestigate the previous theoretical conclusion. The results show that the interest rate,total factor productivity, ambiguity aversion, the worst expected outputs and householdlife cycle variables have significant influence on agricultural households creditdemand. Fourthly, interest rate has twofold impact on credit demand of agriculturalhouseholds. On one side, interest rates affect whether farmers borrowing or not, on theother side, the impact of interest rates on the amount of credit demand is not significant.Fifthly, ambiguity aversion preference combine the " rational peasant " theory and "moral peasant " theory. Ambiguity aversion preference is in line with maxmin strategy.Thereinto, the min policy of the maxmin strategy is in line with “moral peasant”achieving minimum risk behavior logic, and the max policy of the maxmin strategy is inline with “rational peasant” achieving maximum profit behavior logic. The articleconsider the behavior logic of ambiguity aversion is a theory of mutual integration of"moral peasant " and "rational peasant". Sixthly, there is no significant correlationshipbetween risk aversion and ambiguity aversion among agricultural households.The above conclusion has both theoretical and practical aspects of significance.From the theoretical side, the article discusses the mechanism of how uncertainty affectsthe credit demand of agricultural households, providing a theoretical basis for enrichingthe rural financial market risks mechanism literature. From the practical side, the articleis contributed to investigating the uncertainty transmission mechanism of monetaryrural economy due to macro "financial crisis" and other changes in the economicsituation and provide appropriate foundation for the response action on the productionand consumption influence of uncertainty.