International Finance Discussion Papers (IFDP)
December 2022
Credit access and relational contracts: An experiment testing informational and contractual frictions for Pakistani farmers
M. Ali Choudhary and Anil K. Jain
Abstract:
Credit access is limited in rural areas, especially in developing economies. Using a novel two-stage experimental design in Pakistan, first, we document that bank lending only serves a small fraction of rural credit demand. Second, we test the importance of information and enforcement technology frictions for limiting bank lending by randomly varying loan contractual terms across farmers and find that enforcement technology is the primary friction. Third, using an endline survey, we document that farmers tend to correctly identify the financial consequences of non-repayment. Fourth, our results suggest one possible solution to overcome this financial friction---a motivated and interlinked intermediary and the use of relational contracts.
DOI: https://doi.org/10.17016/IFDP.2022.1363
PDF: Full Paper
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