The Role of Bounded Rationality in Farm Financing Decisions – First Empirical Evidence –

Abstract

Farmers do not often change from their house bank to another bank, even if the competing banks offer better conditions. This “reluctance to switch” can be explained, on the one hand, by the transaction costs resulting from such a change of business relation. On the other hand, it may be the result of bounded rationality. The results of a survey of North German farmers show that they are indeed bounded rational borrowers. They greatly underestimate the monetary disadvantages which are caused by the higher interest rates for loans from their house bank. In other words: They do not switch bank even if their individually perceived transaction costs are already “covered” by the lower interest rates of the alternative loan offer.