Overcoming information barriers to the provision of financial contracts for smallholder agriculture in developing countries

The provision of financial contracts, such as credit and insurance contracts, to smallholder farmers in developing countries has been hampered by information constraints, which has resulted in credit rationing and low demand for index insurance contracts. Hence, overcoming the information barriers through intelligently designed financial contracts is a critical objective that could help expand access of financial contracts and improve the welfare among poor farmers. This dissertation studies three innovative mechanisms for tackling information barriers in lending and insurance and finds that each of these mechanisms might help expand the provision of financial products in smallholder agriculture.;In the second chapter, I study the effect on moral hazard of an innovative microfinance contract that combines joint liability with a modest collateral requirement. Both collateralized individual loan contracts and joint liability group lending contracts have received much attention in the microfinance literature, yet neither contract has been found to be optimal from a welfare perspective. Using a theoretical framework, I show that adding a collateral requirement to a joint liability contract reduces moral hazard but has an ambiguous effect on credit market participation. To test the predictions of the model, I conduct a unique framed field experiment among active credit group members in Tanzania. The results demonstrate that adding a collateral requirement reduces moral hazard among borrowers and helps increase repayments without compromising the effect of the social collateral in the groups. Moreover, I find evidence that a collateral requirement also leads to a modest reduction in credit market participation.;The third chapter uses a theoretical model to show that credit rationing can be reduced when lenders are able to utilize past default information about borrowers. In particular, I develop a two-period rationing model with adverse selection and moral hazard assuming endogenous interest rates and collateral requirements. Using this model, I first characterize a credit market equilibrium under imperfect information and show that rationing is possible if borrowers' wealth is limited. Then, by allowing lenders to collect and utilize default information about borrowers after period one, I show that they will reoptimize contracts in period two, resulting in a reduction of adverse selection and an increase in welfare for the majority of borrower. Moreover, by also allowing lenders to change their behavior in period one in response to the lenders' actions, I show that information sharing also reduces moral hazard, collateral requirements and rationing for all borrowers.;The fourth chapter considers information barriers in the index insurance market and proposes and analyzes an alternative index insurance contract, which combines a satellite based index with the potential for a second-stage audit, and with the objective of minimizing basis risk. While index insurance has been seen as the solution to the problem of covariant risk, most existing contracts are of poor quality, leaving significant basis risk with the farmer. Our results suggest that this contract closely mimics the payouts of an area-yield contract, but at a fraction of the cost. Based on expected utility analysis, I also show that demand for this contract would exceed that of an area-yield contract and a pure satellite contract under reasonable loading cost assumptions.