employment by household members and perceived problems in obtaining credit have a negative effect on both the incidence and the amount of credit. In another study that examines credit constraints in rural Mexico, Key (1997) estimates a structural model that jointly determines production, consumption, and borrowing decisions of households. The author finds that about 32 percent of all formal borrowers are credit constrained (that is, they wished to borrow more than they were able to). The empirical model estimated that the high transaction costs of borrowing from formal lenders prevents small-scale farmers from accessing formal lenders, indicating that a reduction of those transaction costs may induce some small borrowers to switch from informal to formal sources of credit.

As to manufacturing firms, the available evidence shows that credit constraints affect their investment patterns. _First_ , for the period 1984-94, Gelos and Werner (1999) use the accelerator model of investment and the Euler equations, both augmented with cash flows indicator, to estimate the effect of financial liberalization on financing constraints of a set of 1,046 manufacturing firms. They find a strong link between cash flows and investment for most types of firms with smaller firms being more constrained. However, financial constraints were eased for small and exporting firms but not for large firms after financial liberalization. _Second_ , Iscan (1998) estimates a version of the Euler equation to evaluate the impact of the debt crisis of 1982 on manufacturing sector investment. He finds very high discount rates if the 1982-1984 period is included in the sample and lower estimates (close to world interest rate plus spread) when this period is excluded. This suggests that this period of crisis was characterized by binding financing constraints. _Third_ , Sánchez (2001) estimates an accelerator model of investment supplemented with a cash flows indicator using a 3-digit industry level data on manufacturing establishments for 198499. He finds that cash flows have a significant effect on investment rates. Furthermore, capital expenditures of small firms are twice as sensitive to changes in cash flows than for large firms, suggesting that financing constraints are more severe for small firms. Lastly, the author finds increasing sensitivity to cash flows for small firms over time, and indication of worsening levels of credit constraints. _Fourth_ , using balance sheet data for 176 listed firms for 1990-2000, Castaneda (2002) finds that both firms associated to economic groups and independent firms display less sensitivity of investments to cash flows following the 1995 crisis, which is a somewhat puzzling result for independent firms. A possible explanation is that firms with access to capital markets provide supplier credit to independent firms, recycling funds to the economy. An actively functioning internal capital markets that channel funds between members of an economic group would result in lowering credit constraints for members of an economic group. Another interesting finding is that firms that had relationships with banks experienced greater financing constraints, as a result of persistent weaknesses in the banking sector in this time period. _Lastly_ , Cuevas and others (2002) present evidence of an amplification of liquidity constraints after the banking crisis for firms listed in the stock exchange as well as for manufacturing firms for the period 1990-1999.

This paper seeks to provide new evidence about the extent of credit constraints and their effect on investment using two recently completed surveys that distinguish four categories of economic agents: farmers and microentrepreneurs (also referred to as entrepreneurs or individuals) from a household survey; and agricultural and nonagricultural enterprises, from an enterprise survey. This paper does not intend to provide a definite answer about the roots and consequences of credit constraints, but rather tries to elaborate on the possible explanations of the limited use of formal or informal loans among entrepreneurs and enterprises in Mexico. Lastly, this paper attempts to estimate the effect of removing credit constraints on investment behavior.

This paper defines credit constraints as a situation where rural agents report an unsatisfied demand for loans (formal or informal), which originates from rural agents having projects that are too risky or from 4