Tropical Lending: Strategic Default , Contract Choice and Credit Constraints in the Coffee Chain (wit h 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 incr
eases 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 t
o 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 i
nput purchases from farmers rather than substituting other sources of credi
t. Prices paid to farmers increase implying the existence of contractual ex
ternalities along the supply chain. A calibration of the model suggests tha
t the identified form of moral hazard is sufficient to generate credit cons
traints for these.