Risk Rationing and the Demand for Agricultural Credit

51 Pages Posted: 19 Dec 2012

See all articles by Sivalai V. Khantachavana

Sivalai V. Khantachavana

Cornell University

Leslie Verteramo Chiu

Cornell University - School of Applied Economics and Management

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Rong Kong

Northwest Agricultural and Forestry University - College of Economics and Management

Date Written: December 18, 2012

Abstract

The purpose of this paper is to provide a specific test of the Boucher, Carter and Guirkinger (2008) framework to determine the extent of risk rationing amongst potential rural borrowers. Using data from 730 farm households in the Shaanxi province of China and from 372 farmers in northeastern Mexico, we investigate factors associated with risk rationed, quantity rationed and price rationed farmers. The analysis applies both a linear probability and logit model. We find in China the incidence of risk rationing in farmers to be 6.5%, 14% for quantity rationed and 80% for price rationed. In Mexico, 35% of our sample is risk rationed, 10% quantity rationed and 55% price rationed. Our results from China support the hypothesis that financial poor are more likely to be quantity rationed; in Mexico however, the level of education is found to be important in determining quantity rationed. In both countries, asset wealthy farmers are less likely to be risk rationed; however, income doesn’t appear to have an impact. We provide evidence that the elasticity of demand for credit is different among the three groups of farmers: risk rationed, quantity rationed and price rationed. Risk aversion and prudence are significantly correlated with risk rationing in China, while only risk aversion is significant in Mexico. Our results suggest that efforts to enhance credit access must also deal with risk and risk perceptions. With some exceptions, our investigation supports the theoretical model presented in Boucher, Carter and Guirkinger (2008).

Keywords: risk rationing, rural credit, agricultural finance, Mexico, China

JEL Classification: O53, O54, Q14, O13

Suggested Citation

Khantachavana, Sivalai V. and Verteramo Chiu, Leslie and Turvey, Calum G. and Kong, Rong, Risk Rationing and the Demand for Agricultural Credit (December 18, 2012). Available at SSRN: https://ssrn.com/abstract=2191297 or http://dx.doi.org/10.2139/ssrn.2191297

Sivalai V. Khantachavana

Cornell University ( email )

Ithaca, NY 14853
United States

Leslie Verteramo Chiu

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

Calum G. Turvey (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

Rong Kong

Northwest Agricultural and Forestry University - College of Economics and Management ( email )

Yangling
China

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