Dynamic InceNtive,reputation Effect And Self-enforcement Of The Interlinked Credit Contracts

Credit is an indispensable condition for the development of agricultural production.But due to the inherent nature of agriculture,the main body of agricultural management suffers from severe production risks and market risks.At the same time the lack of effective collateral collateral and other issues make the poor suffer more serious credit rationing in the rural credit market,which means default risk preventing institutional loans to rural areas.For a long time,microcredit is the main model to solve the "difficult borrowing" of peasants and play a unique role in the struggle against poverty all over the world.The rate of repayment is even higher than that of some formal institutions,which is mainly due to its use Group lending and joint liability technologies to address adverse selection and moral hazard issues.However,the financial mechanism of microfinance,such as group lending,which is based on human social relations,has solved the problem of mortgage guarantee but cannot effectively resist the market risk and production risk of agricultural production.The interlinked transaction not only solves the problem of farmer's credit rationing,but also can effectively prevent the agricultural special risk,while t his special transaction mode can also promote the farmers to self-enforcement.First,as an alternative to collateral,the interlinked contract forces the borrower to keep the promise of repayment by increasing the default loss through expelling the defaultor from the related market.Secondly,dynamic incentives including progressive lending can increase thefuture earnings' discount value of the farmers who enforced,and then strengthen the reputation effect and thus promote the enforcement of financial contract.Finally,modern credit-product interlinked transactions which undergo practical optimization,enterprises will provide farmers with high quality seed,fertilizer and other production materials and furthermore provide technical support for production,effectively preventingthe agriculturalrisk and improving agricultural production efficiency and profitability.Reputation formed in the interlinked transaction can alleviate the problem of adverse selection by the signal function,and through transaction function suc h as termination of the acquisition of products or stop providing technical services,make farmers deterred of the reputation capital lossand conscientiously fulfill the contract.The basic principle of reputation effect is that reputation capital(expected return value)is greater than the current income if I default,and dynamic incentive is to increase the value of reputation capital,so as to strengthen the reputation effect to promote self-enforcement of the contract.This paper uses the game theory to deduce the micro-mechanism of how dynamic incentive realize the self-enforcement of the interlinked contract and use the structural equation model to analyze,finally get the following main conclusions:First,the dynamic incentive and the reputation effect are positive relations.Reputation value is embodied in with each phase of the good credit record and feedback to the next phase of expanding the size of the loans(or the scale of production,income and interest),which means that dynamic incentive strengthens the reputation effect.Second,thereputation effect of the self-enforcement of the interlinked contract is a positive relationship,indicating that the stronger the reputation effect,the stronger the effect ofself-enforcement in the interlinked transaction.Third,the implementation of dynamic incentives in inter linked transactions is conducive to strengthening the reputation effect and thus promoting self-enforcement.Enterprise implement dynamic incentive by expanding of the loan size of the next phase or enlarges the future production scale or income growth of farmers.It means a "sure expectations",or a future available premium,so make the product market and the credit market formed multi-stage dynamic associated game to encourage farmers to self-enforce.Interlinked credit can not only guide capital,technology and other factors of production flow into the rural areas to promote the industrialization of agriculture,but also effectively alleviate the adverse selection and moral hazard to pro mote self-enforcement.Relevant departments should follow the concept of non-prudential supervision,and actively guide the healthy development of thismodel,in order to release its great potential in promoting the endogenous development of rural finance.