| This dissertation provides a conceptual and empirical exploration of how borrower reputation might lower the costs of lending, affect access to credit, and influence the design of credit contracts. The econometric analysis presented in this thesis suggests that credit histories, whether accrued through informal or formal sector loans, can provide alternatives for collateral requirements, especially in the informal sector.; The first essay uses a panel data set of rural Honduran households to study credit market transitions; specifically, the dynamic evolution of informal and formal sector participation. Mobility patterns of households across four different credit market states are analyzed. The main findings are that: true state dependence plays a significant role in one's ability to borrow; Participation in the formal and informal sectors is a combination of self-selection and rationing from formal sources of credit; Transitions are more commonly toward the formal sector credit.; The second essay provides a dynamic theoretical model that decomposes reputation into three main components: (i) Innate ability, which includes land quality and/or entrepreneurial skill; (ii) Repayment history, which signals level of commitment towards continuing the relationship; and (iii) Credit market experience, which allows farmers to consistently rely on liquidity to pursue high return activities such as adoption of new technology. The theoretical model also highlights the role borrower reputation plays in determining future loan amounts. As borrowers' abilities are realized, lenders design contracts that allow only those over the effective productivity threshold to qualify for larger loan amounts.; The last essay examines the role of borrower reputation in a parallel market structure. Using the Honduran data, econometric estimation of such a structure yields four principal findings: (1) credit contracts in the formal sector are largely collateral driven and not reputation driven; (2) the informal sector credit contracts are borrower reputation based; (3) technical efficiency has a positive impact in determining loan size in the informal sector; (4) the informal sector utilizes positive/negative credit histories to credibly reward/punish borrowers. |
