RISK RATIONING ANDWEALTH EFFECTS IN CREDIT MARKETS: THEORY AND IMPLICATIONS FOR AGRICULTURAL DEVELOPMENT

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....
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RISK RATIONING ANDWEALTH EFFECTS IN CREDIT MARKETS: THEORY AND IMPLICATIONS FOR AGRICULTURAL DEVELOPMENT