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

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  • Stephen R. Boucher
  • Michael R. Carter
  • Catherine Guirkinger

Abstract

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. Copyright 2008, Oxford University Press.

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  • Stephen R. Boucher & Michael R. Carter & Catherine Guirkinger, 2008. "Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 409-423.
  • Handle: RePEc:oup:ajagec:v:90:y:2008:i:2:p:409-423
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.01116.x
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