The Relationship between Physical Financing and Formal Financing from the Perspective of Contractual Arrangements in Rural China

We examined the impact of contractual arrangements on the relationship between physical and formal financing under a theoretical analytical framework of “contractual arrangement-prestige channel-financing structure,” based on the survey data of rice growers in Jiangsu Province, China. We found that physical and formal financing have different relationships. Specifically, though they present a strong substitutability under oral contractual arrangements, they may complement each other under formal contractual arrangements through the prestige channel. Therefore, the government is suggested to give farmers preferential options by encouraging or supporting physical financing, rather than replacing or weakening it with government-led financial support policies.