Leslie J. Verteramo Chiu

Risk rationing and the demand for agricultural credit: a comparative investigation of Mexico and China

Purpose - – The purpose of this paper is to determine the extent of risk rationing among potential rural borrowers in Mexico and China. Design/methodology/approach - – Using primary survey data from 730 farm households in the Shaanxi province of China and from 372 farmers in northeastern Mexico, the authors investigate factors associated with risk rationed, price rationed and quantity rationed farmers. The survey was instrumented to self-identify borrower typologies. In addition the authors created within the survey a discrete-choice credit demand build to determine borrower credit demand elasticities. The analysis applies a linear probability which the authors found to be consistent with multinomial and binary logit models. Findings - – The authors find in China the incidence of risk rationing in farmers to be 6.5, 14 percent for quantity rationed and 80 percent for price rationed. In Mexico, 35 percent of the sample is risk rationed, 10 percent quantity rationed and 55 percent price rationed. The results from China support the hypothesis that the financially poor are more likely to be quantity rationed; in Mexico, however, the level of education is found to be important in determining quantity rationed. In both countries, asset wealthy farmers are less likely to be risk rationed; however, income does not appear to have an impact. The paper provides evidence that the elasticity of demand for credit is different among the three credit rationed groups: risk rationed, price rationed and quantity rationed. Risk aversion and prudence are significantly correlated with risk rationing in China, while only risk aversion is significant in Mexico. The results suggest that efforts to enhance credit access must also deal with risk and risk perceptions. Practical implications - – Risk rationing is an important concept in the understanding of rural credit markets. The findings that only 6.5 and 35 percent of Chinese and Mexican farmers are in stark contrast to each other. For agricultural economies such as Mexico with a significant number of farmers being risk rationing, more effort should be put into financial education and financial practices, including perhaps the use of risk-contingent credit to remove collateral risk. As property rights in China evolve, and new laws are promulgated to permit borrowing against land use rights, the collateralization issue will become much more important in rural credit markets. Originality/value - – This paper is the first to investigate risk rationing in China and Mexico and one of the few research studies empirically investigating risk rationing. A comparative analysis of Mexico and China is enlightening because of the structural differences in the respective agricultural economies. The use of a credit demand build and the enumeration of individual credit demand elasticities is an original contribution to this literature.

Risk Rationing and the Demand for Agricultural Credit

The purpose of this paper is to provide a specific test of the Boucher, Carter and Guirkinger (2008) framework to determine the extent of risk rationing amongst potential rural borrowers. Using data from 730 farm households in the Shaanxi province of China and from 372 farmers in northeastern Mexico, we investigate factors associated with risk rationed, quantity rationed and price rationed farmers. The analysis applies both a linear probability and logit model. We find in China the incidence of risk rationing in farmers to be 6.5%, 14% for quantity rationed and 80% for price rationed. In Mexico, 35% of our sample is risk rationed, 10% quantity rationed and 55% price rationed. Our results from China support the hypothesis that financial poor are more likely to be quantity rationed; in Mexico however, the level of education is found to be important in determining quantity rationed. In both countries, asset wealthy farmers are less likely to be risk rationed; however, income doesn’t appear to have an impact. We provide evidence that the elasticity of demand for credit is different among the three groups of farmers: risk rationed, quantity rationed and price rationed. Risk aversion and prudence are significantly correlated with risk rationing in China, while only risk aversion is significant in Mexico. Our results suggest that efforts to enhance credit access must also deal with risk and risk perceptions. With some exceptions, our investigation supports the theoretical model presented in Boucher, Carter and Guirkinger (2008).

Cross market price support and agricultural development: Quanto options valuation for cash grains in Mexico

Purpose - – This paper aims to develop a market-driven mechanism for commodity price insurance in developing countries lacking access to futures markets or other forms of hedging products. Design/methodology/approach - – The model incorporates futures, exchange rate and local basis risk under the Black-Scholes framework to develop quanto (quantity adjusting option). When the domestic price of a commodity in a developing country is strongly correlated to the price in a futures market, price support premiums can be estimated. The authors use daily corn futures prices, exchange rate MXP/USD, and prices of corn and sorghum at several locations in Mexico. Findings - – The authors calculated the price insurance premium at various local markets in Mexico for corn and sorghum. The results are consistent with those for the USA, showing that relative price premiums are similar. Research limitations/implications - – The results provide a benchmark to estimate the net welfare effects of government programs for agricultural price support. Practical implications - – The model shows that privately provided agricultural price insurance is feasible under certain conditions for developing countries without an established futures market. Originality/value - – This paper provides market-based agricultural options in Mexico which contributes to the existing government price support program.

Socially responsible products: what motivates consumers to pay a premium?

ABSTRACT The motivation to pay a premium for socially responsible products is partly an expression of consumer concern for the well-being of those involved in the production process. Buying a product with a socially responsible label, and donating to a charity are similarly motivated actions. While there is an extensive literature on the economics of charitable giving that examines motivations to donate as well as on the impacts of labelling on consumer demand, there is little overlap between the two literatures. We bridge these two literatures by investigating whether consumers have heterogeneous motivations for paying a premium. Through a laboratory experiment that auctions coffee with hypothetical socially responsible labels that put different weights on in-kind versus cash transfers, we find that those consumers who prefer an in-kind transfer (paternalistic altruists) are willing to pay a 52.5% price premium over standard coffee. Those who prefer that most of the premium is paid as cash (strong altruists) are willing to pay a 42.5% premium. Finally, those who are indifferent to how the premium is spent by the recipient (warm-glow givers) are willing to pay only a 19.2% premium. We discuss the implications of our results and future research directions.