Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development

• Published in: American journal of agricultural economics Vol. 90; no. 2; pp. 409 - 423
• Main Authors: Boucher, Stephen R, Carter, Michael R, Guirkinger, Catherine
• Format: Journal Article
• Language: English
• Published: Malden Blackwell Publishing Inc 01.05.2008; Oxford University Press; Blackwell Publishing, Inc; Blackwell Publishing Ltd
• Subjects: Agricultural credit; Agricultural development; Agricultural economics; Agricultural investment; Agricultural land; Agricultural lending; agricultural policy; Agriculture; Asymmetric information; Bond markets; Collateral; Credit; Credit rationing; Credit risk; economic policy; farm credit; farm income; Farmers; finance; Financial risk; G210; income and wealth; land titling; Lenders; loan risk; Loans; mathematical models; Moral hazard; O130; Property; Q140; Q150; quantity rationing; Rationing; Risk; Risk aversion; risk management; risk rationing; secure loans; Studies; Subsistence farming; Transfer of title; Wealth; Latin America
• ISSN: 0002-9092; 1467-8276
• DOI: 10.1111/j.1467-8276.2007.01116.x

We develop a model that shows that asymmetric information can result in two types of credit rationing: conventional quantity rationing, and "risk rationing," whereby farmers are able to borrow but only under high-collateral contracts that offer them lower expected well-being than a safe, subsistence activity. After exploring its incidence with respect to wealth, we show that risk rationing has important policy implications. Specifically, land titling will be only partially effective because it does not enhance producers' willingness to offer up the collateral needed to secure loans under moral hazard constraints. Efforts to enhance agricultural investment and the working of agricultural credit markets must step beyond land titling and also deal with risk.