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Why Don't Lenders Finance High-Return Technological Change in Developing-Country Agriculture?
American Journal of Agricultural Economics
Vol. 83, No. 4 (Nov., 2001), pp. 1024-1035
Stable URL: http://www.jstor.org/stable/1244711
Page Count: 12
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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.
American Journal of Agricultural Economics © 2001 Agricultural & Applied Economics Association