loanable funds (Bell 1988; Stiglitz and Weiss).<sup>1</sup> As a consequence, equilibrium credit rationing and use of collateral to limit moral hazard by borrowers may play a role. In such a framework, borrowers’ inability to meet lenders’ collateral requirements and the presence of binding credit constraints could reduce productivity while liquidity and other resource endowments (such as family labor and oxen) would have non-negative effects on crop output per unit of land (Feder _et al._ 1990; Guirkinger and Boucher 2008). This, in turn, would imply lower levels of yields, income, and household welfare than in an unconstrained situation.

Determinants of credit rationing and implications of capital market imperfections on levels of investment in general have been explored in a large literature (Drakos and Giannakopoulos 2011; Hubbard 1998). Given the importance of being able to access working capital for inputs in agriculture, a large number of studies aimed to measure credit rationing empirically (Petrick 2005) and subsequently explore its impact on agricultural resource allocation, crop productivity and land related investment (e.g., Diagne and Zeller 2001; Feder _et al._ 1990; Foltz 2004; Guirkinger and Boucher 2008). These studies derive testable relationships between credit constraints and potential outcome variables using the framework of the standard agricultural household model that combines both consumption and production decisions of farm households (de Janvry _et al._ 1991; Singh _et al._ 1986).

# **2.2 Conceptualizing and eliciting different types of credit rationing**

Many studies of credit rationing have focused primarily on supply side restrictions that affect potential borrowers’ credit access in what is referred to as _quantity rationing_ . Reasons include policy-induced limits on interest rates and borrowers’ inability to meet the collateral requirement of lenders. A second type, t _ransaction cost rationing,_ arises as a result of the cost of obtaining credit in terms of preparing a loan application, evaluating collateral and project viability, and monitoring credit use and repayment. As associated costs are largely independent from the loan amount, transaction cost rationing is likely to be particularly severe for small loans which are often catered for by informal credit markets that rely on lower-cost mechanisms for enforcement. Finally, borrowers may be _risk rationed_ , implying that they are unwilling to access credit even if it were available to them because they fear the risk of being indebted and possibly losing the assets pledged as collateral (Barham _et al._ 1996; Boucher _et al._ 2008; Boucher _et al._ 2009; Carter 1988; Guirkinger and Boucher 2008). Unlike quantity rationed households, households who are either transaction cost or risk rationed forgo credit market participation voluntarily even though their projects would be feasible in competitive markets for loans. In this study, we follow others (Boucher

> 1 In the face of imperfect information, lenders might not resort to increasing interest rates as an instrument to equate the demand for and supply of loanable funds because doing so would lead to an increase in the riskiness of the pool loans by either the adverse selection or the incentive effects (for the details see (Stiglitz and Weiss 1981)).

4