BUILT-IN DEFAULT IN AGRICULTURAL CREDIT PROGRAMS

The high rate of delinquency and default in agricultural credit programs has been considered for some time one of the more serious problems in financing agricultural activities throughout the developing world.;The main argument in this thesis is that delinquencies and defaults in these programs are a result of their structure and not necessarily, as the literature often implies, a consequence of mismanagement on the part of the banks or dishonesty on the part of the farmers. These programs, it is argued, have a high "built-in default" due to the high risk of the activities financed (high business risk), to the high leverage allowed (high financial risk) and to the existence of perverse incentives for both farmers and banks.;The experience of dozens of agricultural credit programs throughout the developing world is reviewed in this thesis. It is suggested that serious methodological problems in the existing empirical research might explain at least part of the confusion in the literature.;Contingent Claims Analysis is used to analyze and evaluate the nature and structure of financial incentives for borrowers. It is argued that in certain situations common in agricultural credit, farmers will have an incentive to increase the leverage and the risk of their agricultural activities. The relative magnitude of the variables used in CCA suggests that the implicit subsidies created by defaults are quite substantial.;Various factors that create distortions in the management of these institutions are also analyzed and it is argued that many economic models ignore these critical factors. What might look as evidence of gross mismanagement under these frameworks might be rational responses to incentives once factors such as government transfers are considered.;A case study of a credit institution in Costa Rica is analyzed based on the concepts developed in the thesis. The evidence in this case strongly indicates that delinquencies and defaults cannot be justified on equity or efficiency grounds. Recommendations to solve the default problem are presented and evaluated.