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Of Pirates and Moneylenders: Product Market Competition and the Depth of Lending relationships in a rural market in Chile

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Abstract

It is often suggested that interlinked and monitored loan contract terms such as those used by trader-lenders in rural markets serve as collateral substitutes and therefore should benefit asset-poor borrowers in particular. Yet, empirically this is not always true. For example, most of the new monitored finance from contract farming firms and agro-industry traders during Chile's recent agricultural boom went to medium and large commercial farmers and traditional forms of monitored finance for collateral poor farmers from informal trader-moneylenders actually may have declined. Based on interviews and historical accounts of this market and the analysis of a theoretical model, this paper argues that lenders may have been forced to reduce tied-credit to small farmers in several crops because increased product market competition exacerbated the problem of "pirates sales'' or post-harvest opportunistic default. This further restricted the already narrow set of enforceable property claims upon which monitored credit contracts to solve ex-ante moral hazard contracting problems could have been fashioned. This problem was avoided in crops where product markets are more concentrated and in export activities where crop liens are easier to establish with better capitalized farmers. The model points to an important connection between the nature of market competition and the depth of lending relationships that appears to be important in many other contexts.

Suggested Citation

  • Jonathan Conning, 2001. "Of Pirates and Moneylenders: Product Market Competition and the Depth of Lending relationships in a rural market in Chile," Department of Economics Working Papers 2000-08, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2000-08
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    File URL: http://web.williams.edu/Economics/wp/pirate.pdf
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    Cited by:

    1. Fafchamps, Marcel, 2010. "Vulnerability, risk management and agricultural development," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 5(1), September.
    2. Swinnen, Johan F.M. & Vandeplas, Anneleen, 2007. "Contracting, Competition, and Rent Distribution Theory and Empirical Evidence from Developing and Transition Countries," 103rd Seminar, April 23-25, 2007, Barcelona, Spain 9413, European Association of Agricultural Economists.

    More about this item

    Keywords

    Financial intermediation; monitored lending; moral hazard and costly state verification; Chile;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • N26 - Economic History - - Financial Markets and Institutions - - - Latin America; Caribbean

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