impediments hindering the ability of rural agents and lenders to reduce information asymmetries.<sup>6</sup> This unmet demand for loans can also be explained by “true credit rationing,” which arises when creditors do not raise interest rates (in order to avoid an adverse selection problem) to clear the market and, instead, reject some loan requests from debtors that are willing to pay higher interest rates, and thus are perceived to be too risky.

This paper is organized as follows: Section 2 describes the data and Section 3 presents an overview of loan providers in Mexico. Section 4 discusses the methodology in this paper to measure the extent of credit constraints. Section 5 presents indicators of participation in loan markets, measuring the extent of credit constraints and the self-reported demand for loans in both formal and informal markets. Section 6 empirically analyzes the demand and supply of formal and informal loans. Section 7 studies investment behavior and assesses the effect of credit constraints. Section 8 summarizes the main findings.

# **2. Data sources**

This paper relies on two recently conducted surveys of households and enterprises in Mexico. Both surveys are representative at the national and regional level. The household survey covers farmers and microentrepreneurs—that is the so-called individual entrepreneurs (self-employed and employers) residing in localities with 2,500 to 50,000 inhabitants. It also covers those farmers living in localities with more than 50,000 residents. To identify entrepreneurs, the sample was drawn from the National Employment Survey for the quarter of October-December 2001. The enterprise survey includes agricultural and nonagricultural registered enterprises in localities with 2,500 to 50,000 inhabitants. In localities with more than 50,000 residents, the enterprise survey considers only enterprises in the agrobusiness and fishing sector (agricultural). In localities with less than 2,500 residents, the enterprise survey considers only large enterprises (with more than 100 workers). The sample was drawn from Mexico’s 1999 Economic Census. The enterprises can be legally established as either personas morales, or as personas físicas con actividad empresarial. To avoid an overlap with the household survey, the enterprise survey considers only enterprises with six workers or more.<sup>7</sup> Table 1 summarizes survey results by geographical region and type of economic agent. The final sample of completed questionnaires contains responses for 1,825 farmers, 3,301 microentreprenurs, 1,073 nonagricultural enterprises, and 954 agricultural enterprises.

The household and enterprise surveys offer a unique collection of rarely available data about rural economic agents and their use of financial services. The questionnaire design of both surveys include questions about participation in financial markets, formal or informal, and the characteristics of the credit and savings products used by entrepreneurs and enterprises. The household survey questionnaire includes questions about expenses and income, fixed assets, inventories, employment, purchases and sale of fixed assets, marketing of products, suppliers, formality and social capital indicators, training received,

> 6 Loan markets are characterized for information asymmetries. Potential borrowers have better and more information about the true credit risk of investment projects than lenders. In those circumstances, lenders rely on different mechanisms to screen potential borrowers while potential borrowers use different mechanisms to signal their creditworthiness to lenders.

> 7 The sampling design divides the Mexican territory into five regions according to Mexico’s National Development Plan. Region 1 (South & Southeast) includes the states of Campeche, Chiapas, Guerrero, Oaxaca, Quintana Roo, Tabasco, Veracruz, and Yucatán. The following states plus Mexico City are included in region 2 (Center): Hidalgo, México, Morelos, Puebla, and Tlaxcala. Region 3 (Center-west) includes the states of Aguascalientes, Colima, Guanajuato, Jalisco, Michoacán, Nayarit, Querétaro, San Luis Potosí, and Zacatecas. Region 4 (Northwest) includes the states of Baja California, Baja California Sur, Sinaloa, and Sonora. Region 5 (Northeast) includes the states of Coahuila, Chihuahua, Durango, Nuevo León, and Tamaulipas.

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