Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development

Posted: 11 Apr 2008

See all articles by Steve Boucher

Steve Boucher

University of California, Davis - Departments of Economics and Agricultural Resource Economics

Michael R. Carter

University of Wisconsin - Madison - Department of Agricultural & Applied Economics

Catherine Guirkinger

University of Namur - Department of Economics

Date Written: 2007-09

Abstract

We develop a model that shows that asymmetric information can result in two types of credit rationing: conventional quantity rationing, and risk rationing, whereby farmers are able to borrow but only under high-collateral contracts that offer them lower expected well-being than a safe, subsistence activity. After exploring its incidence with respect to wealth, we show that risk rationing has important policy implications. Specifically, land titling will be only partially effective because it does not enhance producers' willingness to offer up the collateral needed to secure loans under moral hazard constraints. Efforts to enhance agricultural investment and the working of agricultural credit markets must step beyond land titling and also deal with risk.

Suggested Citation

Boucher, Stephen and Carter, Michael R. and Guirkinger, Catherine, Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development (2007-09). American Journal of Agricultural Economics, Vol. 90, No. 2, pp. 409-423, May 2008, Available at SSRN: https://ssrn.com/abstract=1119007 or http://dx.doi.org/10.1111/j.1467-8276.2007.01116.x

Stephen Boucher

University of California, Davis - Departments of Economics and Agricultural Resource Economics ( email )

2105 Social Sciences & Humanities Building
One Shields Avenue
Davis, CA 95616
United States

Michael R. Carter

University of Wisconsin - Madison - Department of Agricultural & Applied Economics ( email )

427 Lorch St.
Madison, WI 53706-1503
United States
608-263-2478 (Phone)

Catherine Guirkinger (Contact Author)

University of Namur - Department of Economics ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

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