The theory of the optimal allocation of risk and the Townsend Thai panel data on financial transactions are used to assess the impact of the major formal and informal financial institutions of an emerging market economy. We link financial institution assessment to the actual impact on clients, rather than ratios and non-performing loans. We derive both consumption and investment equations from a common core theory with both risk and productive activities. The empirical specification follows closely from this theory and allows both OLS and IV estimation. We thus quantify the consumption and investment smoothing impact of financial institutions on households including those running farms and small businesses. A government development bank (BAAC) is shown to be particularly helpful in smoothing consumption and investment, in no small part through credit, consistent with its own operating system, which embeds an implicit insurance operation. Commercial banks are smoothing investment, largely through formal savings accounts. Other institutions seem ineffective by these metrics.

Collateral requirements that lenders place on small cotton producers can lead to risk rationing and to farmers’ dependence on downstream parties. This paper presents a cotton fund that consists of a set of contracts – credit, insurance, warrant and forward – that enables producers to tackle specific agricultural risks and gain access to market finance. These financial contracts proved to be successful at guaranteeing the fund as issuer of state-contingent debt securities in the capital markets. The fund, as an intermediary, lent to cooperatives to help finance small cotton producers in northern Argentina. The paper explains the experimental design of this innovative fund and presents a potential alternative to government intervention by moving away from ex post subsidies for small producers and, instead, facilitating ex ante private credit. The paper contributes to the literature on rural financial intermediation by designing a new mechanism to raise funds coming from relatively uninformed investors and creating collateral substitutes through delegated monitoring to overcome asymmetric information and limited commitment.

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