Direct Elicitation of Credit Constraints: Conceptual and Practical Issues with an Application to Peruvian Agriculture

Abstract

This article provides a methodological bridge leading from the well‐developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We outline a survey strategy to directly elicit households’ status as unconstrained or constrained in the credit market and, if constrained, to further identify which of the three nonprice rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of “factual” and “interpretative” survey questions. Finally, using a farm‐level data set from Peru, we illustrate how the methodology can be used to estimate the impacts of credit constraints.

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