Information asymmetries, risk, and non-price rationing: An exploration of rural credit markets in northern Peru

This dissertation offers a conceptual and empirical exploration of how asymmetric information, risk preferences, and the distribution of wealth impact the structure and performance of rural credit markets. A model of contract design in the presence of moral hazard is developed in which a risk neutral lender offer contracts to a risk averse farmer who owns a potentially profitable investment project. The model gives rise to the potential for quantity rationing and an additional form of non-price rationing called risk rationing . Both quantity and risk rationed farmers would seek a credit contract in a first best---or symmetric information world---but end up without a contract when information is asymmetric. Whereas quantity rationed farmers are ""involuntarily"" excluded because they are not offered a contract, risk rationed farmers ""voluntarily"" withdraw from the market because the limited set of contracts that are available under asymmetric information imply too much risk. Like those that are quantity rationed, risk rationed farmers end up undertaking low risk, low return projects.; The structure of the credit market depends on the distribution of endowments since both the terms of available contracts and the willingness of a farmer to accept a given contract are functions of the farmers' collateral wealth and liquidity. The theoretical analysis also highlights the potential role the credit market can play in providing insurance. The ability of the credit market to provide insurance is limited by asymmetric information since lenders seek to overcome problems of moral hazard by shifting downside risk to borrowers.; These issues are explored empirically using survey data collected from 550 farmers in northern Peru in 1997. The survey design permits the separate identification of risk rationed, quantity rationed, and price rationed farmers, Over half of the sample farmers were non-price rationed in the formal credit market, A multinomial logit analysis reveals patterns of endowment based credit rationing---in which poorer farmers are more likely to be non-price rationed---that are consistent with the theoretical model.