Credit Constraints and Productivity in Peruvian Agriculture

Abstract

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,