A note on household approach to credit rationing in agrarian economies

Using clues from transaction cost economics this note develops an intertemporal agricultural household model to explain the demand-side credit rationing from formal financial institutions in agrarian economies. The model employs ex-ante transaction costs, namely search cost and negotiation cost to explain this phenomenon. The model shows that with market failure an agricultural household's production decision is not separate from its consumption decision. This is when the policy analysis household approach, which includes simultaneous decision making in production and consumption side, becomes essential.