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Why Don't Lenders Finance High-Return Technological Change in Developing-Country Agriculture?

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Author Info
Blackman, Allen () (Resources for the Future)

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Abstract

Most of the literature attributes credit constraints in small-farm developing-country agriculture to the variability of returns to investment in this sector. But the literature does not fully explain lenders’ reluctance to finance investments in technologies that provide both higher average and less variable returns. To fill this gap, this article develops an information-theoretic credit market model with endogenous technology choice. The model demonstrates that lenders may refuse to finance any investment in a riskless high-return technology— regardless of the interest rate they are offered—when they are imperfectly informed about loan applicants’ time preferences and, therefore, about their propensities to default intentionally in order to finance current consumption.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-01-17.

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Date of creation: 01 Apr 2001
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Handle: RePEc:rff:dpaper:dp-01-17

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Keywords: : agriculture asymmetric information credit developing country technology adoption.

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Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes
Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  2. Braverman, Avishay & Guasch, J. Luis, 1986. "Rural credit markets and institutions in developing countries: Lessons for policy analysis from practice and modern theory," World Development, Elsevier, vol. 14(10-11), pages 1253-1267. [Downloadable!] (restricted)
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    Other versions:
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  8. Bell, Clive, 1990. "Interactions between Institutional and Informal Credit Agencies in Rural India," World Bank Economic Review, Oxford University Press, vol. 4(3), pages 297-327, September.
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  12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
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