Financial contracting and intermediary structures in a rural credit market in Chile: A theoretical and empirical analysis

This is a theoretical and empirical study of the changing structure and operation of the market for rural finance in San Clemente county, an agricultural region in southern Chile. Several variants on a model of financial intermediation provide a framework for explaining the observed pattern of credit market fragmentation and for understanding how traders, contract farming firms, and other formal and informal lenders allocate control rights, and use monitoring, social sanctions and termination threats to create contracts that substitute for collateral.; Using data from a 1994 farm household survey I estimate an empirical model of credit rationing and spillover. Depending on access and choice farmers employ loans from either a bank, a trader, neither, or both. While rationing is found to be pervasive, many poor non-borrowing households are not credit constrained.; I extend the model to a multi-task principal multiagent setting to explore tradeoffs in another sort of intermediary structure: group loan contracts such as those used by the Grameen Bank of Bangladesh and some traders in Chile. Each group member must be given incentive to choose unobserved actions both as a producer-borrower and as a monitor of others, and the contract must prevent collusion. "Social collateral" to replace missing physical collateral can at times be created via a diversification effect but involves costs so group loans will be chosen over other structures only where the correlation in project returns across borrowers is not high and peer-monitors have a decided information and enforcement advantage relative to outside intermediaries.; Extending the framework to include the problem of ex-post verification of crop returns explains the observed inverse correlation between the value of lending and the number of product buyers in the market and helps to interpret the initial puzzle of so few informal trader-moneylenders in several crop activities.; I conclude that while there may be substantial scope for innovative private and public sector intermediation strategies to reduce trading frictions in credit markets, these mechanisms can only imperfectly substitute for physical collateral. The depth and development of the financial markets ultimately depends on the rising net worth of borrowers in the economy.