Roles of borrower transaction costs and rationing constraints on market choice and the effective demand for credit

This dissertation provides conceptual frameworks and empirical evidence that evaluates farmers' behavior in rural credit markets, especially focusing on roles of borrower transaction costs and rationing constraints on their credit decisions--optimal credit market choice and the effective demand for credit.;In rural credit markets where two kinds of lenders, formal, regulated credit markets (RM) and private, unregulated markets (URM), coexist with different credit delivery systems, borrower transaction costs and rationing constraints affect farmers' choices of credit sources and the subsequent effective demand for credit. This dissertation first provides conceptual outlines to see how these two features affect farmers' decisions on (i) credit market participation, (ii) choice of source of credit, and (iii) the effective demand for credit amounts.;In the empirical section, we check the potential interdependency between credit market choice and the effective demand for credit under disequilibrium state with a variant of a two-step estimation procedure: (1) estimation of market choice function by a probit model and (2) the following effective demand for credit function by a truncated disequilibrium model. In the first step, market choice function is estimated using a probit model to see the influence of borrower transaction costs on choice of credit source. As the second step, a truncated disequilibrium model is used to estimate the effective demand for credit with the minimum condition and to account for missing information at the mass point of zero transaction. Potential interdependencies of error terms between these two estimations and sample selection bias regarding the market choice are corrected by construction of a new regressor based on the probability of participation in the sample (inverse of Mills ratio) from a probit model and its inclusion in the effective demand for credit equation. Regime classification probabilities are then calculated to see how pervasive rationing is in the rural credit markets and to check the effect of borrower transaction costs on choice of credit source. We find that there is enough evidence that borrower transaction costs in URM, rather than potential rationing probabilities in RM, might play key roles for some farmers to choose URM as their credit source.