Rwanda’s poorest farmers. Yet, while supply- and demand-side interventions to ease access to agricultural finance in Rwanda could potentially have large positive impact on crop production, the effect could be dampened if households face additional market imperfections such as inadequate input supply or distortions in the labor market.

# **4.3 Determinants of activity choice**

As most households in rural Rwanda do not specialize in one activity only, we use a multivariate probit<sup>18</sup> specification with participation in nonfarm self-employment, farm wage labor, and nonfarm wage labor as dependent variable, to estimate determinants of activity choice. Independent variables include head’s characteristics, assets, non-labor income, access to credit, credit rationing, and locational characteristics. The results are given in table 7. Everything else constant, being credit constrained is estimated to significantly reduce the likelihood of nonfarm self-employment by 6.3 percentage points while increasing the likelihood of engaging in agricultural wage labor, the lowest-return activity considered, by 4 percentage points.<sup>19</sup> Participation in nonagricultural labor markets is estimated to be unaffected by credit constraints, in line with the notion that education is more important for such employment than credit. Thus, beyond its impact on agricultural production, credit rationing reduces the scope for nonfarm selfemployment. Detailed data to test hypotheses regarding the underlying mechanisms for business start-ups could be of great interest.

Although our survey does not allow us to do so, it reveals a number of regularities. Endowments with land or livestock reduce the likelihood of participating in wage labor but land ownership increases the likelihood of participating in nonfarm self-employment even beyond its impact on credit rationing, similar to what emerges for other durable assets. Location also matters with those close to a market are more likely to participate in nonfarm self-employment. Female-headed households are less likely to participate in both nonfarm self-employment and wage labor. Education is estimated to increase self-employment to some extent but affects participation in nonfarm wage labor in a quadratic form. While members of larger households are also more likely to participate in both types of wage employment, no significant relationships are observed with the likelihood of participating in nonfarm self-employment.

# **5. Conclusion and policy implications**

Based on an improved estimation technique and the use of nationally representative data, this paper finds that credit rationing in Rwanda is widespread and that it affects the efficiency of agricultural production as well as the likelihood of participating in higher-return nonfarm economic activities. The magnitudes

> 18 We use the mvprobit STATA command that estimates multiple equations probit model using the method of maximum simulated likelihood (Cappellari and Jenkins 2003).

> 19 The marginal effects are computed by taking the difference in the marginal predicted probabilities of success with a change from being unconstrained to constrained in the semi-formal sector.

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