State Contraction and Credit Market Development in Rural Peru

Financial liberalization policies have significantly altered the structure of rural credit markets and the terms of household access to them throughout Latin America. This paper has two main objectives. First, it uses household survey data from northern Peru to fill an empirical void by presenting a detailed description of the terms of formal and informal credit contracts and the frequency of non-price rationing among rural households in a recently liberalized credit market. Second, it provides a conceptual framework which helps us predict and understand credit market structure. This conceptual discussion reviews the theoretical literature on credit contracts based on the economics of information and suggests an extension to incorporate the possibility of risk rationing whereby a household has access to a collateral based credit contract but instead retreats to a low return, low risk activity.