The Cost Effects of Government-Subsidised Credit: Evidence from Farmers' Credit Unions in Taiwan

Hung-Jen Wang, Ching-Cheng Chang and Po-Chi Chen

Journal of Agricultural Economics, 2008, vol. 59, issue 1, pages 132-149

Abstract: We investigate government-subsidised credit effects on participating financial institutions' performance in terms of cost efficiency. Using farmers' credit unions in Taiwan as an example, we find that credit unions' cost inefficiency is positively correlated with the extent of involvement in subsidy programmes. The results are robust to the control of local competition and labour quality. In addition to the stochastic frontier models from which we obtain the main results, we also propose a new distribution-free estimation method based on quantile regressions. Results of this study point out that, when evaluating the social costs of the credit programmes, it is important to take into account the efficiency loss generated among financial intermediaries by credit subsidy programmes. Copyright 2007 The Authors. Journal compilation 2007 The Agricultural Economics Society.

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