(DP 1989-10) Price Uncertainty and Loan Repayment in-Kind

Abstract

We show that the Pareto superiority of loan repayment in-kind within a tied credit arrangement to a cash-for-cash scheme under uncertain output price depends crucially on the farmer loan demand elasticity and his risk attitude. When demand is inelastic, risk aversion among farmers is required for Pareto superiority. We show that certain soft credit intervention initiatives may have output effects opposite to those intended.