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

15 Pages Posted: 28 Apr 2020

See all articles by Stephen R. Boucher

Stephen R. 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 - Centre de Recherche en Economie du Developpement (CRED)

Date Written: May 2008

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.

Keywords: asymmetric information, credit rationing, land titling, moral hazard, risk rationing

Suggested Citation

Boucher, Stephen R. and Carter, Michael R. and Guirkinger, Catherine, Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development (May 2008). American Journal of Agricultural Economics, Vol. 90, Issue 2, pp. 409-423, 2008, Available at SSRN: https://ssrn.com/abstract=3584647 or http://dx.doi.org/10.1111/j.1467-8276.2007.01116.x

Stephen R. Boucher (Contact Author)

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

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

University of Namur - Centre de Recherche en Economie du Developpement (CRED) ( email )

Rue de Bruxelles 61
Namur, 5000
Belgium

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