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Access to Credit and the Effect of Credit Constraints on Costa Rican Manufacturing Firms

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  • Alexander Monge-Naranjo
  • Luis J. Hall

Abstract

This paper examines the finances and the effect of credit limitations on the behavior and performance of firms in Costa Rica. The study is based on a survey of manufacturing firms conducted by the authors during 2001. The paper characterizes the profile firms’ finances, examines the determinants of firms’ access to banking credit and tries to assess the effect of credit constraints on the behavior and performance of firms. The paper finds that while banks are the main source of credit for larger firms, non-banking credit (trade plus informal credit) remains the leading source of funds for smaller firms. Moreover, own funds and informal credit is a leading form of credit for newly created firms. It is also found that the probability of having banking credit and the fraction of banking credit/total debt is mostly affected by (if anything) characteristics of the firm and not by those of their owners. Indeed, the firm’s value and age, and whether it keeps formal accounting procedures appear as the most relevant determinants of access to banking credit. With respect to the starting up finances of firms, the data is not conclusive on the determinants of banking credit, yet it suggests a negative relationship with the previous entrepreneurship experience of the owner. The paper discusses different explanations, all of which highlight the importance of credit constraints. Adopting ideas from the econometric literature on treatment effects, the paper explores the effect of banking credit on the behavior and performance of firms. Two different methods are used to correct for selection biases: a parametric two-step point method and a non-parametric method that estimates upper and lower bounds for the effects. While the results are not statistically conclusive, both methods do suggest that having access to banking credit positively affects firms’ performance.

Suggested Citation

  • Alexander Monge-Naranjo & Luis J. Hall, 2003. "Access to Credit and the Effect of Credit Constraints on Costa Rican Manufacturing Firms," Research Department Publications 3164, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:3164
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    References listed on IDEAS

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    1. Dirk Krueger & Fabrizio Perri, 1999. "Risk Sharing: Private Insurance Markets or Redistributive Taxes?," Working Papers 99-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Alexander Monge-Naranjo & Javier Cascante & Luis J. Hall, 2001. "Enforcement, Contract Design, and Default: Exploring the Financial Markets of Costa Rica," Research Department Publications 3126, Inter-American Development Bank, Research Department.
    3. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
    4. Horowitz, Joel L & Manski, Charles F, 1995. "Identification and Robustness with Contaminated and Corrupted Data," Econometrica, Econometric Society, vol. 63(2), pages 281-302, March.
    5. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
    6. Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996. "Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms," Journal of Development Economics, Elsevier, vol. 51(2), pages 367-386, December.
    7. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    8. 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.
    9. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    10. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
    11. Lehnert, Andreas & Ligon, Ethan & Townsend, Robert M., 1999. "Liquidity Constraints And Incentive Contracts," Macroeconomic Dynamics, Cambridge University Press, vol. 3(01), pages 1-47, March.
    12. Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996. "Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms," Journal of Development Economics, Elsevier, vol. 51(2), pages 367-386, December.
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    Cited by:

    1. Arturo Galindo & Fabio Schiantarelli, 2002. "Credit Constraints in Latin America: An Overview of the Micro Evidence," Research Department Publications 3165, Inter-American Development Bank, Research Department.
    2. Keikha, Alireza & Alipour, Farshid & Mohammadi, Hamid, 2014. "The Nonlinear Relationship between Bank Credits and Agricultural Employment in Mazandaran Province," International Journal of Agricultural Management and Development (IJAMAD), Iranian Association of Agricultural Economics, vol. 4(4), December.
    3. Arturo Galindo & Fabio Schiantarelli, 2002. "Limitaciones crediticias en América Latina: panorámica general de los elementos de juicio al nivel micro," Research Department Publications 4306, Inter-American Development Bank, Research Department.
    4. Sucre Reyes, M.A., 2014. "Finance, growth and social fairness : Evidence for Latin America and Bolivia," Other publications TiSEM ad514338-1973-4ec9-b5c7-2, Tilburg University, School of Economics and Management.
    5. World Bank, 2007. "Costa Rica : Investment Climate Assessment," World Bank Other Operational Studies 7691, The World Bank.

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