Do low-income households inevitably benefit more from microfinance participation? Evidence from rural China

It is widely accepted that microfinance has the potential to contribute to household welfare in developing countries, while few studies have highlighted the extent to which microfinance contributes to low-income rural households. This article employs household-level data to identify factors that influence low-income households’ decisions to participate in microfinance for farming production activities, and how these factors and microfinance affect agricultural income. The study applies an endogenous switching regression model to account for the selection bias and treatment effect, and uses a decomposition method to examine the direction and extent of the effect of participating in microfinance on the agricultural income gap of rural households. The empirical findings show that the participation of low-income households in microfinance has significantly increased their agricultural income. In addition, the study further shows that microfinance has exacerbated the agricultural income gap of rural households.