Thoughts on “The Supply and Demand Side Impacts of Credit Market Information” by

McIntosh, de Janvry, and Sadoulet

Steve Boucher, UC-Davis

Prepared for the conference:

Financial Innovations and the Real Economy

Federal Reserve Bank of San Francisco

November 16, 2006

Outline

• What I learned from Craig’s paper

• More questions I’d like Craig to answer

• The need for more institutional innovations in rural (agricultural) finance

Broad Lessons Learned

• Information really matters!

• Different types of information asymmetries matter in different ways (adverse selection versus moral hazard).

• Strengthening credit bureaus represents a relatively low cost, high return strategy to strengthen credit markets

How did they do it?

• Innovatively took advantage of “natural” experiment

• Innovative implementation of randomized field experiment

Questions/Concerns for Craig

• Potential confounding of information effect with other changes in lender behavior

• To what degree does the introduction of CB’s impact the risk sharing rules of contracts?

• Would individual reporting of group members’ performance have a different effect than group reporting?

• How large is the “crowding out” of informal insurance that results from CB’s?

Challenge: How to extend micro-finance to rural areas?

• First-stage reforms– Financial liberalization– Strengthen property rights (titling)– Follow Yunus

• Results…

Frequency of Credit Constraints among Farm Households in Latin America

Unconstrained Constrained

Honduras (2001)

61% 39%

Nicaragua (2002)

42% 58%

Peru(2003)

43% 57%

Source: Boucher, Carter and Barham (2005) & Boucher and Guirkinger (2006)

Nicaragua Peru Honduras0

20

40

60

80

Co

nst

rain

ed

Ho

use

ho

lds

as

% o

f U

nco

nst

rain

edInputs Used per HectareNet Family Income per HectareTotal Productive Wealth

Figure 1 Incidence & Cost of Credit Constraints

Source: Boucher, Carter and Guirkinger, 2006

How prevalent are credit constraints?(farm households in Peru)

Household Formal Sector Outcome 1997 2003 Constrained 56% 43% Quantity Rationed 37% 10% Risk Rationed 9% 22% Transaction Cost Rationed 10% 11% Unconstrained 44% 57% Borrowers 28% 25% Non-borrowers 16% 32%

Root Problems

• Imperfect insurance markets• Thin land markets

– Spatial nature of land (you must go to the land implies relatively few potential buyers)

– politically charged nature of land (contradiction: Borrowers must be able to commit to allowing foreclosure. But land is not just another asset…)

• Innovations??– Index insurance linked to loans?