Credit Constraints and Investment Behavior in Mexico’s Rural Economy

This paper uses two recently completed
surveys of individual entrepreneurs (farmers and
microentrepreneurs) and registered enterprises (agricultural
and nonagricultural) operating in Mexico s rural sector to
provide new evidence about the factors influencing the
incidence of credit constraints and investment behavior. To
measure the incidence of credit constraints, the authors use
self-reported information on whether economic agents have a
demand for loans, separating formal and informal markets.
They define 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 impediments hindering
the ability of rural agents and lenders to reduce
information asymmetries. The authors find that the
self-reported demand for loans is low. Nevertheless, the
incidence of credit constraints is pervasive, especially
among individual entrepreneurs. The low use of loans has
consequences for the amount of investments that occur in the
rural economy, posing a major obstacle to Mexico s
convergence towards its NAFTA partners. The empirical
analysis, which includes proxies of business prospects and
creditworthiness, shows that improving the availability of
loans to credit constrained agents would increase the number
of agents making investments and their investment to capital ratios.