Risk, Credit Constraints and Financial Efficiency in Peruvian Agriculture

Based on a panel data set, we use a two-stage analysis to evaluate the effects of access to formal credit on financial efficiency of farms in northern Peru. The first stage uses non-parametric data envelope analysis to estimate farm-specific measures of financial efficiency; 28 per cent of farmers are financially inefficient and credit constraints reduce profits of these farmers by an average of between 17 and 27 per cent. The second stage uses Tobit regression to evaluate the determinants of financial inefficiency; the results point to uninsured risk as a key determinant of financial inefficiency and suggest that policies to strengthen agricultural insurance markets would likely pay large dividends in rural Peru.