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

A survey was conducted to examine the effect of credit constraints on investment levels in Peruvian agriculture using direct elicitation methodology (DEM). All three forms of nonprice rationing, namely quantity, transaction costs, and risk arise due to information and enforcement issues linked with loan contracts, which prevent households from materializing profitable projects. A household can be segmented into three mutually exclusive categories, namely unconstrained, supply-side constrained, and demand-side constrained. Using the comprehensive definition of credit constraint, which includes quantity, risk, and transaction-cost rationing, the fraction of Peruvian households that are constrained in the formal credit sector declined from 57% in 1997 to 44% in 2003. Accounting for transaction cost and risk rationing results in impact that is over twice as large as that derived under the restrictive definition. This sharp rise reveals that transaction-cost- and risk-rationed households control 24% of sample land.