Tropical Lending: Strategic Default, Contract Choice and Credit Constraints in the Coffee Chain (with Arthur Blouin)

Abstract:
We use detailed contract level data from a U.S.-based lender that extends loans to coffee mills around the world to identify the sources of, response to and consequences of credit markets imperfections. We exploit unanticipated increases in reference prices to identify strategic default as a key source of moral hazard. Parties adapt to moral hazard through contractual forms that leverage scarce relational capital and trade-off exposure to price risk vs. exposure to counterparty risk. The value of informal enforcement amounts to 50% of the value of the sale contract for repaying borrowers. A RDD shows that firms are credit constrained. Additional loans are used to increase input purchases from farmers rather than substituting other sources of credit. Prices paid to farmers increase implying the existence of contractual externalities along the supply chain. A calibration of the model suggests that the identified form of moral hazard is sufficient to generate credit constraints for these.