A growing body of research documents the importance of saving constraints for households and enterprises in the developing world. While prominent strands of research have studied how financial markets’ imperfections affect other markets, they have mostly focused on insurance and, particularly, credit markets. We propose a mechanism through which saving constraints can spill over into output markets: When producers are saving constrained, trustworthy buyers can offer infrequent delayed payments – a saving tool – and purchase at a lower price, thus departing from standard trade credit logic. In this project, we develop a model of this interlinkage and tests it in the context of the Kenyan dairy industry.
Evidence from the largest agricultural subsector in Kenya
The study focuses primarily on the dairy industry in Kiambu County in Central Kenya. Multiple data sources, experiments, and a calibration provide evidence concerning
- producers’ demand for infrequent payments;
- heterogeneity across buyers in the ability to supply low frequency payments;
- a segmented market equilibrium where buyers compete by providing either liquidity or saving services to producers;
- low supply response to price increases.
We also provide additional evidence from other settings, including labor markets, and discuss policy implications concerning contract enforcement, financial access, and market structure.