This article provides a methodological bridge leading from the well-developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We outline a survey strategy to directly elicit households' status as unconstrained or constrained in the credit market and, if constrained, to further identify which of the three nonprice rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of "factual" and "interpretative" survey questions. Finally, using a farm-level data set from Peru, we illustrate how the methodology can be used to estimate the impacts of credit constraints. (c) 2009 by The University of Chicago. All rights reserved..

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.Key words: asymmetric information, credit rationing, land titling, moral hazard, risk rationing.In a competitive world of symmetric information and costless enforcement, credit contracts could be written conditional on borrower behavior. Borrowers would then have access to loans under any interest rate-collateral combination that would yield lenders a zero expected profit. However, as a large literature has shown, information asymmetries and enforcement costs make such conditional contracting infeasible and restrict the set of available contracts, eliminating as incentive incompatible high interest rate, low collateral contracts.1 This contraction of contract space can result in quantity rationing in which potential borrowers who lack the wealth to fully collateralize loans are involuntarily excluded from the credit market and thus prevented from undertaking higher return projects. This paper theoretically demonstrates that the contraction of contract space induced by asymmetric information can result in another form of nonprice rationing, one that we label "risk rationing." Risk rationing occurs when

This article 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 nonprice 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%. Copyright (c) 2008 International Association of Agricultural Economists.

From field observations of credit cooperatives in Cameroon, we find that 19% of the loans taken are fully collateralized by savings held in the same institutions. This behavior is costly to the borrower, as it represents a net interest payment of about 24% per year. While traditional explanations may partly explain this behavior, interviews with members of the cooperatives suggest the following new rationale: members resort to borrowing to signal to friends and relatives that they are poor and do not have savings available. By doing so, they can avoid requests for financial help. We develop a signaling model to analyze the conditions under which this behavior is an equilibrium outcome.

Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single-scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.JEL classifications: D81, O12, O16, Q12, Q13 (M. R. Carter). # Work completed when Bellemare was at the Sanford School, Duke University.1 Boucher et al. (2008) call this outcome risk rationing. Risk rationing occurs when lenders, constrained by asymmetric information, shift so much contractual risk to the borrower that the borrower voluntarily withdraws from the credit market even when she has the collateral wealth needed to qualify for a loan contract.2 In a recent paper, Karlan et al. (2012) find that farmers invest more in their farms and take riskier production choices when offered rainfall index insurance.