The impact of credit rationing on farmer's economic equilibrium

Abstract

The paper deals with the theoretical analysis of the impact of credit rationing on farmer's economic equilibrium. The analysis is carried out based on the derived dynamic optimization model, which is the dynamic investment model with adjustment costs. The credit rationing is introduced by imposing an upper limit on the control variable, which is in this case represented by the investment spending. Then, the optimal control is used to solve the optimization problem in the situation of both with and without credit constraints. Finally, the situations without and with credit rationing are compared. The results show that the occurrence of credit rationing or in general financial constraints significantly determines the capital accumulation and investment decisions of farmers and as a result their supply functions.