Investing in Information
The discussion has so far assumed that the amount of information available
to lenders is unalterable. But lenders have many opportunities to augment information. They can, for instance, investigate the quality of projects and monitor their implementation. That information is costly does not necessarily
imply that outcomes are inefficient (see Townsend 1978); one has to ask first
whether lenders are likely to collect and process information efficiently. The
answer may be negative if the "public good" nature of information is taken
seriously-the fact that, once acquired and paid for by one lender, information
may be exploitable by another. There seems to be no evidence of this theoretical possibility being practically important in rural areas of developing countries. Furthermore, the experience of industrial countries suggests that markets
have effectively created mechanisms for generating information about borrowers that help to circumventhe public good problems. Private and independent
credit-rating agencies have existed in the United States since the middle of the
nineteenth century (Pagano and Jappelli 1992).
For rural financial markets of developing countries, lack of expertise in
project appraisal and the high costs of monitoring and assessment relative to
the size of a loan may mean that people are excluded from the credit market,
even though they have projects that would survive a profitability test based on
complete information. Braverman and Guasch (1989) suggest that the cost of
processing small loans can range from 15 to 40 percent of the loan size (see
also Adams, Graham, and Von Pischke 1984). But these kinds of transactions
costs do not necessarily lead to inefficient exclusion from the credit market. It
is at least possible that they reflect the real economic cost of serving a clientele
where information is scarce. Whether there is an inefficiency depends on
whether the human capital and other factors that go into appraising loans are
priced at their true economic costs. If not, the high figures for transactions
costs discussed by Braverman and Guasch might indicate inefficiency.
The point is a reminder that parallel market failures may be important. If
markets that provide inputs for the credit market are also imperfect, credit will
be allocated inefficiently. From a policy viewpoint, therefore, the question is
whether policy ought not to be focused on the real problem, rather than on
the proximate problem of misallocated credit.