Direct Elicitation of Credit Constraints: Conceptual and Practical Issues with an Empirical Application to Peruvian Agriculture

This paper provides a methodological bridge leading from the well-developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form of non-price rationing adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We then outline a survey strategy to directly classify households as credit unconstrained or constrained and, if constrained, to further identify which of the three non-price rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of “factual” and “interpretative” survey questions. Finally, using a data set from northern Peru, we demonstrate the importance of accounting for all three forms of credit constraints by estimating the increase in farm production that would result from relaxing credit constraints. The inclusion of transaction- and risk-rationed households in the constrained group results in an estimated impact that is twice as large as the impact when only quantity rationed households are considered constrained.Financial Economics,

Access to capital in rural Thailand : an estimated model of formal versus informal credit

The aim of this paper is to understand the mechanism underlying access to credit. The author focuses on two important aspects of rural credit markets in Thailand. First, moneylenders and other informal lenders coexist with formal lending institutions such as government or commercial banks, and more recently, micro-lending institutions. Second, potential borrowers presumably face sizable transaction costs obtaining external credit. The author develops and estimates a model based on limited enforcement and transaction costs that provides a unified view of those facts. The results show that the limited ability of banks to enforce contracts, more than transaction costs, is crucial in understanding the observed diversity of lenders.Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Banks&Banking Reform,Economic Theory&Research,International Terrorism&Counterterrorism,Financial Intermediation,Environmental Economics&Policies

Empirical measurement of credit rationing in agriculture: a methodological survey

Empirical analysis of rural credit market failure has been of key scientific and political interest in recent years. The aim of this paper is to give an overview of various methods for measuring credit rationing of farms employed in the literature. Furthermore, based on a common analytical framework entailing a formal model of a credit rationed farm household, the methods are subjected to a comparative evaluation of their specific strengths or shortcomings. Six approaches are distinguished: measurement of loan transaction costs, analysis of qualitative information collected in interviews, analysis of quantitative information collected in interviews by using the credit limit concept, analysis of spill-over effects with regard to secondary credit sources, econometric household modelling, and the econometric analysis of dynamic investment decisions. The first approach defines credit rationing as the impossibility to take a loan due to prohibitively high, measurable transaction costs on loan markets, which is a price rationing mechanism. All other approaches at least implicitly define credit rationing as a persistent private excess demand in terms of a quantity restriction. The six approaches are more or less closely linked to the neo-classical efficiency concept. An explicit comparison with a first-best solution is impossible in the first three approaches, since they essentially rely on a subjective assessment of borrowers access to credit, based on qualitative or quantitative indicators. The fifth and sixth approach allow a rigorous interpretation in the framework of neo-classical equilibrium theory. The fourth approach takes an intermediate position, since spill-over on segmented loan markets reveals a willingness to pay with regard to the supposedly less expensive but rationed primary source. Approaches are fairly data demanding in general, usually requiring specific data on loan transactions. Even so, most approaches are applicable to cross-sectional household data. Only dynamic modelling of investment decisions necessitates the availability of panel data, therefore restricting the applicability in low-income and transition countries. With the exception of the first, all methods surveyed might plausibly be used to empirically detect credit rationing. -- G E R M A N V E R S I O N: Die empirische Analyse von Marktversagen auf ländlichen Kreditmärkten ist in den vergangenen Jahren von hohem wissenschaftlichen und politischen Interesse gewesen. Ziel dieses Beitrags ist es, einen Überblick über verschiedene in der Literatur angewandte Methoden zur Messung von Kreditrationierung zu geben. Auf der Grundlage eines gemeinsamen analytischen Bezugsrahmens werden die Methoden darüber hinaus einer vergleichenden Bewertung im Hinblick auf ihre Stärken und Schwächen unterzogen. Es werden sechs Vorgehensweisen unterschieden: die Messung von Kredittransaktionskosten, die Analyse von in Interviews gewonnenen qualitativen Informationen, die Analyse von in Interviews erhobenen quantitativen Information unter Rückgriff auf das Konzept des credit limits, die Analyse von Überschusseffekten im Hinblick auf sekundäre Kreditquellen, ökonometrische Haushaltsmodellierung sowie die ökonometrische Analyse von dynamischen Investitionsentscheidungen. Die erste Vorgehensweise versteht unter Kreditrationierung die Unmöglichkeit, einen Kredit zu erhalten aufgrund von prohibitiv hohen, messbaren Transaktionskosten auf Kreditmärkten. Es handelt sich hierbei um einen Mechanismus der Preisrationierung. Alle anderen Vorgehensweisen definieren Kreditrationierung zumindest implizit als andauernde Überschussnachfrage, folglich eine Mengenbeschränkung. Die sechs Vorgehensweisen sind mehr oder weniger eng mit dem neoklassischen Effizienzkonzept verbunden. Ein expliziter Vergleich mit einer first-best Lösung ist in den ersten drei Vorgehensweisen jedoch unmöglich, da sie auf einer subjektiven Einschätzung des Kreditzugangs beruhen. Die fünfte und sechste Methode erlauben hingegen eine strikte Interpretation im Rahmen der neoklassischen Gleichgewichtstheorie. Die vierte Vorgehensweise nimmt eine Zwischenstellung ein, da Überschusseffekte auf segmentierten Kreditmärkten eine Zahlungsbereitschaft im Hinblick auf die primäre, rationierte Kreditquelle implizieren. Die Methoden erfordern die Verfügbarkeit von geeigneten Datensätzen über Kredittransaktionen. Die meisten Ansätze können allerdings auf Querschnittsdaten angewendet werden. Lediglich die dynamische Modellierung von Investitionsentscheidungen erfordert Paneldaten und beschränkt daher die Einsatzmöglichkeit in Entwicklungs- und Transformationsländern. Mit Ausnahme des ersten können alle Ansätze auf plausible Weise für die empirische Untersuchung von Kreditrationierung eingesetzt werden.agricultural finance,credit rationing,quantitative analysis,micro-econometrics,Agrarfinanzierung,Kreditrationierung,quantitative Analyse,Mikroökonometrie

Direct elicitation of credit constraints: Conceptual and practical issues with an empirical application

Replaced with revised version of paper 08/03/05.Financial Economics,

Conservation Payments, Liquidity Constraints and Off-Farm Labor: Impact of the Grain for Green Program on Rural Households in China

This study evaluates the off-farm labor response of rural households participating in the Grain for Green program in China, the largest conservation set-aside program in the developing world. Using a panel data set that we designed and implemented, we examine the impact of the program on changes in off-farm labor participation between 1999 (pre-program) and 2004 (post-program) using a difference-in-differences approach and several extensions that account for program intensity. We also test whether the program impact is diverse depending on level of physical and human capital of participants. We find that on average the Grain for Green program has a positive effect on off-farm labor participation. Importantly, however, we find that program effects vary across groups of individuals in the sample. For example, we find that lower initial levels of wealth enhance the impact of the program on the off-farm employment activity. This result supports our view that the Grain for Green program may be relaxing liquidity constraints for the participating households and that is one reason why participants are more likely to find off-farm employment compared to non-participants. The positive impact of the conservation payments on off-farm labor is in stark contrast with the findings in the US where most studies have found that government payments to farmers decrease off-farm labor participation. One reason for the difference in findings between China and US may be because there are more impediments to participating in off-farm labor market in the poor areas of rural China (the areas in which the programs are being implemented) compared to the US and Grain for Green helps overcome these constraints. It could also be that there are differences in the age structure of the farming population between China (which is generally younger) and the US (which is generally older). This interpretation is reinforced by the finding that, while the average impact is positive, there is an even larger measured positive effect for the younger cohort. The measured effect of Grain for Green is negative for the older cohorts. We also find no impact on off-farm labor participation for individuals with low educational attainment (and positive for those with higher levels of education), suggesting that human capital is necessary when trying to achieve a structural change to earning activities. If policymakers want to achieve a win-win outcome through Grain for Green by meeting both the program's environmental and development goals, they may need to provide extra support (for example, through greater assistance to education) to the vulnerable sub-populations in the program areas.Payments for environmental services, off-farm labor supply, Grain for Green program, China, program evaluation, Environmental Economics and Policy, Farm Management, J22, O13, Q23,

Credit Constraints and Productivity in Peruvian Agriculture

This paper evaluates the performance of a rural credit market in Peru. We develop a model that shows that collateral requirements imposed by lenders in response to asymmetric information can lead not just to quantity rationing but also to transaction cost rationing and risk rationing. Just like quantity rationing, these two additional forms of non-price rationing adversely affect farm resource allocation and productivity. We test the insights of the model using a panel data set from Northern Peru. We estimate the returns to productive endowments for constrained and unconstrained households using a switching regression model. We find that, consistent with the theory, productivity is independent of endowments for unconstrained households but is tightly linked to endowments for constrained households. We estimate that credit constraints lower the value of agricultural output in the study region by 26%.Financial Economics, International Development,

Credit and the no-surcharge rule

A controversial aspect of payment cards has been the “no-surcharge rule.” This rule, which is part of the contract between the card provider and a merchant, states that the merchant cannot charge a customer who pays by card more than a customer who pays by cash. In this paper we consider the design of an optimal card-based payment system when cash is available as an alternative means of payment. We find that a version of the no-surcharge rule emerges as a natural and advantageous feature of such a system.

Financial constraints in economic transition: Empirical evidence from Ukrainian large farms

This paper addresses the question of financial constraints in Ukrainian agriculture in transition. The main objective is to reveal the evidence of the both phenomena, soft budget constraints and credit rationing, investigating investment behaviour of large farms in Ukraine. Our empirical analysis is based on unbalanced panel data containing 529 agricultural enterprises from three Ukrainian regions between 2001 and 2005. Estimates of the Euler investment equation for several sub-samples reveal a dissimilar level of financial constraints. We confirm the presence of the soft financial environment (soft budget constraints) for the Ukrainian large farms being in an unconstrained financial regime. The farms belong to this regime if they receive credits after being unprofitable in two consecutive years. The other farms defined a priori as being in an constrained financial regime face evidence of credit rationing. With regard to the empirical results, we derive macroeconomic implications of financial constraints in the agriculture of Ukraine.transition agriculture, investment, soft budget constraints, credit rationing, Ukraine, Agricultural Finance,