Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard

This paper analyzes the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen ahead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are subject to moral hazard. In contrast to other analyses, the case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead relies on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-tasking game, where borrowers must be given incentives to be diligent as financed entrepreneurs and as monitors of others. Potential side contracting or collusion amongst borrowers is shown to only harm credit access, even when borrowers enjoy a monitoring advantage relative to outsiders.Joint-Liability; Group-Lending; Credit-Cooperatives; Financial-Intermediation

Latifundia Economics

This paper proposes a simple general equilibrium theory of agrarian production organization to explain the emergence and persistence of latifundia - minifundia type patterns of agrarian production organization such as have prevailed historically in many parts of Latin America. When land ownership is concentrated, the exercise of market power over land can facilitate the exercise of control over labor, as labor supply to landlord estates is affected by peasant access to land. Equilibria may emerge where landlords, behaving as multimarket Cournot oligopolists, inefficiently hoard land to drive up land rentals and corral cheaper labor into their expanding estates. Labor-service tenancy arrangements, similar to those used in practice, emerge as landlords try to price discriminate. These contracts help to restore allocative inefficiency but lead to lower equilibrium peasant wages and welfare. Population growth, differential technical progress on landlord and peasant farms, and other changes in the physical and economic environment are shown to transform equilibrium patterns of agrarian production organization in ways that are consistent with agrarian trajectories observed in late nineteenth century Chile and several other regions and periods. The model also clarifies how agentsÂ’ incentives to challenge property rights change along with equilibrium agrarian structures.

Why isn't there more Financial Intermediation in Developing Countries?

Financial intermediation, Mutual insurance , Safety nets , Microfinance , Microcredit

Rural Financial Markets in Developing Countries

This review examines portions of the vast literature on rural financial markets and household behavior in the face of risk and uncertainty. We place particular emphasis on studying the important role of financial intermediaries, competition and regulation in shaping the changing structure and organization of rural markets, rather than on household strategies and bilateral contracting. Our goal is to provide a framework within which the evolution of financial intermediation in rural economies can be understood.Rural Finance, Financial Intermediation, Agricultural Credit

Community Based Targeting for Social Safety Nets

This paper interprets case studies and theory on community involvement in beneficiary selection and benefit delivery for social safety nets. Several considerations should be carefully balanced in assessing the advantages of using community groups as targeting agents. First, benefits from utilizing local information and social capital may be eroded by costly rent-seeking. Second, the potential improvement in targeting criteria from incorporating local notions of deprivation must be tempered by the possibility of program capture by local elites, and by the possibility that local preferences are not pro-poor. Third, performance may be undermined by unforeseen strategic targeting by local communities in response to national funding and evaluation criteria, or by declines in political support.

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

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 ChileÂ’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.Financial intermediation, monitored lending, moral hazard and costly state verification, Chile

Land Reform and the Political Organization of Agriculture

The modern theory of agrarian organization has studied how the economic environment determines organizational form under the assumption of stable property rights to land. The political economy literature has modelled the endogenous determination of property rights. In this paper we propose a model in which the economic organization of agriculture and the political equilibrium determining the distribution of property rights are jointly determined. In particular, because the form of organization may affect the probability and distribution of beneÞts from agrarian reform, it may be determined in anticipation of this impact. The model offers a reason for why tenancy, despite its economic advantages has been so little used in countries where agrarian reform is a salient political issue. We argue that this in particular helps to understand the dearth of tenancy and the relative failure of land reform in Latin America.Agrarian Organization, Political Economy, Land Reform

Managing Economic Insecurity in Rural El Salvador: The role of asset ownership and labor market adjustments

Rural households often rely heavily on short-term readjustments in labor supply between wage and self-employment in farm and non-farm activities as an essential strategy to protect consumption and the value of productive investments against unexpected shocks and to take advantage of changing economic opportunities. The efficacy of such coping strategies, and hence a householdÂ’s vulnerability to shocks, may in turn be affected by that householdÂ’s ownership of land or other assets. This paper employs a two-round panel survey of 494 rural households in El Salvador to study the impact of a 1997 weather-related downturn in economic activity and agricultural labor demand on household incomes and welfare. Examining the changing pattern of household labor supply and poverty, reveals that the loss of wage labor hours was a primary determinant of the rise in poverty in this period, and that landless agricultural laborers were particularly vulnerable. Panel regression analyses suggest that households that owned even small amounts of land or other productive assets were better able to protect the marginal return to household labor in the downturn year. The results lend support to the view that in response to shocks, households fall back on farm and non-farm self-employment activities were productivity was determined by their ability to intensify the use of land and other owned assets. Controlling for other factors, ownership of land and other assets also helped households to maintain children's school enrollments.

Community-Based Targeting Mechanisms for Social Safety Nets: A Critical Review

This paper interprets case studies and theory on community involvement in beneficiary selection and benefit delivery for social safety nets. Several considerations should be carefully balanced in assessing the advantages of using community groups as targeting agents. First, gains from utilizing local information and social capital may be eroded by costly rent-seeking. Second, the potential improvement in targeting criteria from incorporating local notions of deprivation must be tempered by the possibility of program capture by local elites, and by the possibility that local preferences are not pro-poor. Third, intended outcomes may be undermined by unforeseen strategic targeting by local communities in response to national funding and evaluation criteria, or by declines in political support