A classical question in development economics is why people do not take advantage of high-return opportunities, even when they may be aware of different assets' return profiles. In a context where selling assets to smooth consumption is still a prevalent method of financing expenditures in many developing countries, we study the relevance of asset market liquidity in agricultural technology adoption and mechanisation. How do dynamic considerations of dissaving in such contexts affect farmers’ investment choices? To what extent does asset market liquidity play a role in deterring individuals from investing in higher return - but less liquid - assets and technologies?
The liquidity of an asset is defined as its ability to be realised as cash-on-hand, which is not straightforward in thin markets due to the time it takes to find a potential buyer. The study conducts a lab-on-the-field experiment to elicit incentivised willingness to pay for a 'buyback guarantee' scheme that would ease the secondary market matching constraint for farmers in rural Kenya. The study finds that farmers are willing to pay approximately 20% of the asset value to get a 6 months long put option of guaranteed resale. Theoretically, this finding indicates that the valuation of farming equipment include a large liquidity premium, which in turn affects the price and quantity choices at the equilibrium.
The study expands on the literature on structural transformation and agricultural technology adoption by proposing a new channel to understand the observed sectoral investment choices in low-income economies. As the liquidity level of an asset depends on market tightness as well as the pre-existing sectoral composition of the local economy (through local market shares), this analysis of liquidity is closely tied to the channels of structural transformation. The effect highlighted suggests that secondary markets could help experimentation with technologies. Some of the insights from this study could help governments access tools to stimulate investment in targeted sectors by improving secondary market access or providing buyback guarantees.
