Can land transfer relax credit constraints? Evidence from China

Although many studies have examined what drives credit constraints and their negative impact, evidence on the mechanism of relaxing credit constraints is scarce. This paper explores effective solutions to help households improve their access to credit. Using the China Family Panel Studies data from 2018, we employ an endogenous switching probit model to examine whether and to what extent land transfer can ease credit constraints. We find that households that transfer their land in or out are, respectively, 31.4% or 21.4% less credit constrained than those that do not. Participation in land transfers can improve borrowers’ financial situations through income increases and pledging assets as collateral, alleviating both formal and informal credit constraints. Our results suggest that any government initiatives to promote the efficiency of land transfer to ease credit constraints can help boost economic growth in China. •This paper develops efficient mechanisms for alleviating credit constraints.•Households that engage in land transfer are less likely to be credit constrained.•The effect of land transfer in is more pronounced than that of land transfer out.•Land transfer improves access to credit through income and collateral mechanisms.•Promoting the efficiency of land transfer can mitigate credit rationing.