Credit access and transferable land rights

This paper develops a model in which small landholders earna return from their land but can increase their income by borrowingfunds to invest in a risky project. The model allows us to studythe impact of different legal policies governing the use ofland as collateral in debt contracts. In this framework, wefind that legislation sanctioning the use of land as collateralcan sometimes have unintended consequences. In particular, whenfarmers and banks have asymmetric valuations over land plots,introducing collateral based loans can lead to a reduction inthe number of low-risk farmers that choose to borrow funds.This finding offers one explanation for why farmers in countrieslike Bolivia and Mexico have resisted policies that promiseto facilitate the use of land as collateral.