Social Science Research Council

"Risk, Wealth and Sectoral Choice in Rural Credit Markets"

My research focuses on the analysis of post-liberalization credit market institutions in rural areas of developing countries. More specifically I examine how well formal and informal credit markets perform for the poor. In the literature this question has been examined primarily from the supply side, where it is well established that the poor are more likely to be excluded from formal credit markets. In my analysis I pay particular attention to demand-side constraints as well: even if the poor have both profitable investments to make and access to credit, they may not be willing to take a formal loan because they do not want to bear the risk of losing their collateral in the case that they cannot repay their loan (they are "risk rationed"). An informal loan may be more expensive but also less risky and might therefore be preferred. I have developed a theoretical model to study these questions in the context of moral hazard. The theoretical analysis shows that the impact of wealth on risk rationing and on sectoral choice is ambiguous. I plan to conduct an empirical analysis to test this theory and study the impact of credit access on household welfare. I will use data from Northern Peru where, in the fall of 2003, I supervised the collection of farm household data in the department of Piura. Five hundred households who had been surveyed in 1997 were re-interviewed. Aside from extensive data on demographics, farm production and consumption, these data contain information on loans and the household perception about credit. Thanks to the IDRF grant I will be able to go back to Peru in the fall of 2004 to be involved in the design of the survey instrument for the next round of data collection and in the supervision of the data collection. Furthermore, in order to complete my analysis of risk, contract terms and their relation to the household wealth, I need supply side data. I plan to survey lenders who operate in the region the sample households live in. I want to interview both formal and informal lenders.