Credit Constraints and Productivity in Peruvian Agriculture

This paper aims at quantifying the impact of formal sector credit constraints on farm productivity. The chosen context of investigation is Peru, following the liberalization of rural financial markets in the early 1990's. Credit market failures are a long acknowledged problem in developing economies and have multiple implications in terms of efficiency and equity.

• The authors develop a simple theoretical model that illustrates how different types of credit constraints have a similar negative impact on farm productivity;
• This is followed by an empirical exploration of the relationships between productivity and endowments of land and liquidity, for constrained and unconstrained households, using panel data;
• The purpose is to show that credit constraints can take multiple forms, each of which breaks the independence between household's resource allocation and endowments.

The findings, consistent with the model, are that:

• Productivity depends on endowments for constrained households but not for unconstrained households;
• Alleviating all types of credit constraints would raise the value of output in the study region by 26%.