Selling low and buying high: An arbitrage puzzle in Kenyan villages

Large and regular seasonal price fluctuations in local grain markets appear to o↵er African farmers substantial inter-temporal arbitrage opportunities, but these opportunities remain largely unexploited: small-scale farmers are commonly observed to “sell low and buy high” rather than the reverse. In a field experiment in Kenya, we show that credit market imperfections limit farmers’ abilities to move grain intertemporally, and that providing timely access to credit allows farmers to purchase at lower prices and sell at higher prices, increasing farm profits. To understand general equilibrium e↵ects of these changes in behavior, we vary the density of loan o↵ers across locations. We document significant e↵ects of the credit intervention on seasonal price dispersion in local grain markets, and show that these GE e↵ects strongly a↵ect our individual level profitability estimates. In contrast to existing experimental work, our results indicate a setting in which microcredit can improve firm profitability, and suggest that GE e↵ects can substantially shape estimates of microcredit’s e↵ectiveness. JEL codes: D21, D51, G21, O13, O16, Q12