Risk Rationing and the Demand for Agricultural Credit

Abstract

The purpose of this paper is to provide a specific test of the Boucher, Carter and Guirkinger (2008) framework to determine the extent of risk rationing amongst potential rural borrowers. Using data from 730 farm households in the Shaanxi province of China and from 372 farmers in northeastern Mexico, we investigate factors associated with risk rationed, quantity rationed and price rationed farmers. The analysis applies both a linear probability and logit model. We find in China the incidence of risk rationing in farmers to be 6.5%, 14% for quantity rationed and 80% for price rationed. In Mexico, 35% of our sample is risk rationed, 10% quantity rationed and 55% price rationed. Our results from China support the hypothesis that financial poor are more likely to be quantity rationed; in Mexico however, the level of education is found to be important in determining quantity rationed. In both countries, asset wealthy farmers are less likely to be risk rationed; however, income doesn’t appear to have an impact. We provide evidence that the elasticity of demand for credit is different among the three groups of farmers: risk rationed, quantity rationed and price rationed. Risk aversion and prudence are significantly correlated with risk rationing in China, while only risk aversion is significant in Mexico. Our results suggest that efforts to enhance credit access must also deal with risk and risk perceptions. With some exceptions, our investigation supports the theoretical model presented in Boucher, Carter and Guirkinger (2008).