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Why don't Lenders Finance High‐Return Technological Change in Developing‐Country Agriculture?
Author(s) -
Blackman Allen
Publication year - 2001
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/0002-9092.00227
Subject(s) - loan , investment (military) , economics , consumption (sociology) , rate of return , agriculture , finance , order (exchange) , interest rate , business , financial economics , ecology , social science , sociology , politics , political science , law , biology
Most of the literature attributes credit constraints in small‐farm developing‐country agriculture to the variability of returns to investment in this sector. But the literature does not fully explain lenders' reluctance to finance investments in technologies that provide both higher average and less variable returns. This article develops an information‐theoretic credit market model with endogenous technology choice. The model demonstrates that lenders may refuse to finance any investment in a riskless high‐return technology—regardless of the interest rate they are offered—when they are imperfectly informed about loan applicants' time preferences and, therefore, about their propensities to default intentionally in order to finance current consumption.