| This dissertation theoretically and empirically investigates the performance of rural credit markets in developing countries. The first essay develops a model of economic activity and loan sector choice of a risk averse agent in the presence of moral hazard. I show that the informal credit market serves both agents who are excluded from the formal credit market by their lack of collateral, and agents who are unwilling to risk losing the collateral required by formal lenders. I then examine the role of agents' wealth on access to credit and choice of loan sector. I show that access to formal loans is unambiguously biased against the poorest agents. Wealth has an ambiguous effect on the sector choice of wealthier agents. I provide sufficient conditions on agent preferences such that the informal sector will be preferred by either the relatively poor or the relatively rich.The second essay explains the coexistence of formal and informal credit markets in Piura, Peru. Using panel econometric analysis, I show that the informal sector serves farmers excluded from the formal sector, and farmers who prefer informal loans over formal loans because of their lower transaction costs or lower risk. A detailed analysis of contract terms confirms that informal loans are, on average, more expensive but less risky than formal loans. Finally, I argue that differences in contract terms across sectors are explained by differences in loan technologies which, in turn, are attributable to economies of scope and greater proximity between borrowers and lenders in the informal sector.The final essay evaluates the impacts of formal credit constraints on farm production. I develop a model of farm production showing that credit constraints can derive from three different outcomes, namely quantity rationing, transaction cost rationing and risk rationing. In each case, constrained households make less efficient use of their productive endowments. I evaluate the impact of credit constraints on productivity by estimating a switching-regression model using panel data. I find that credit constraints in the formal sector have a significant negative effect on farm productivity. |
