Conceptualising the Effects of Seasonal Financial Market Failures and Credit Rationing in Applied Rural Household Models

A wide variety of farm household models have provided a valuable theoretical basis for empirical and conceptual analysis of interactions between production and consumption resource allocations of poor rural people. A weakness of common applications of many such models, and unfortunately of much analysis, is failure to routinely also recognise and adequately describe the fundamental seasonal nature of most agricultural production and the effects of pervasive seasonal finance market failures on poor rural people’s behaviour and welfare. This is despite considerable theoretical work demonstrating the importance of seasonal financial market failures as constraints on agricultural development. A general model recognising this is presented, with graphical applications showing the potential importance of seasonal finance constraints on farm households’ behaviour and welfare. Formal methods for allowing for the effects of seasonal finance constraints on household responses to policy and other change should be standard tools used by applied rural development economists.