On the verge of EU accession, Poland’s agricultural sector is characterised by a number of distinct structural weaknesses, which are a major reason for the unsatisfactory income situation of rural households. Among these weaknesses are that farm productivity is substantially below EU standards, investment has performed much weaker as compared with the overall Polish economy, and structural change has been very small. It has been suggested that credit access is a crucial factor for overcoming these undesired outcomes. Furthermore, the Polish government massively intervenes on rural credit markets, in particular by granting subsidies on working capital and investment loans for agriculture. Against this background, the aim of the present research is to discover how far potential deficiencies on rural credit markets can be made responsible for the structural weaknesses of the Polish farm sector and thereby provide an economic rationale for government activity. Central to the analysis is the notion of credit rationing. This notion abounds in the recent literature on credit market problems, although it is not used in a uniform way. In this monograph, credit rationing is understood to indicate a situation of persistent private excess demand for credit. The subsequent theoretical and empirical analysis explores how far this concept can be made fruitful for the understanding of the Polish rural credit market and the effects of governmental intervention. The major findings of the study can be summarised as follows: 1. The theoretical investigation of credit markets sets out that credit rationing is by definition excluded in the traditional neoclassical market model, whereas it is a likely outcome on markets with asymmetric information. However, theory does not provide unambiguous propositions regarding the welfare assessment of credit rationing. Since the presence of asymmetric information cancels the functioning of the price mechanism, the traditional concepts of social efficiency are no longer valid. As a consequence, credit rationing does not necessarily imply underinvestment, and it generally does not create a case for straightforward government policy. It seems therefore reasonable to analytically decouple the analysis of credit rationing and under- or overinvestment. The subsequent analysis in this monograph focused on the first of these. 2. The extent to which asymmetric information has harmful effects on investment outcomes is shown to depend on the availability of counteracting arrangements, such as collateral, joint liability, or reputation of borrowers. The way in which governments can improve on these instruments will play a decisive role for successful policy action. Any intervention measures should consider the conditions and causes that are responsible for an undesirable market outcome, in case that this has been successfully identified. 3. In the framework of a two-period farm household model, the consequences of introducing a binding credit constraint are examined. The market interest rate loses its relevance for the household internal allocation of funds and is replaced by an endogenous, unobservable shadow interest rate. Compared with a first-best world without credit rationing, the household will reduce output, which implies a loss of income. An increase in government transfers relaxes the liquidity constraint and thus has positive effects on farm output. In a multi-period household model with endogenous equity formation, credit rationing has the effect that investment cannot immediately attain its optimal level. The household thus reduces current consumption in favour of equity formation. 4. The presence of a perfect capital market allows the convenient separation of production or investment decisions on the one hand and consumption decisions on the other. Both farm household models suggest that this cannot be maintained under a binding credit constraint. As a consequence, there is no objective criterion anymore which allows to assess the (private) efficiency of input use or investment activities. Both decision complexes can only be made simultaneously with the household’s consumption plan and are thus affected by the household’s preferences. Any empirical production or investment analysis has to take these interdependencies into account. 5. In a reflection on economic methodology, it is argued that econometrics cannot be the fundamental benchmark for the falsification of theories. The methodological standpoint of critical rationalism should therefore be left behind and be replaced by a more pragmatic and instrumentalist position. The empirical results of the present study are primarily based on a regression analysis of cross-sectional survey data, which includes qualitative and quantitative indicators of credit rationing. 6. According to statements of farmers made during the survey, 80 percent of farm households took at least one loan in the reporting period 1997-1999. Almost half of the borrowers obtained less credit than desired and are hence regarded as credit-rationed. Central determinants of credit rationing are the reputation of the loan applicant as well as demographic household characteristics. Over all loan types, respondents with a good credit history have a 30 percentage points lower probability of being rationed than borrowers who rescheduled a loan in the past. In addition, more adult males in the household decrease the probability of being credit-rationed, while more females increase it. If only short-term borrowing is considered, collateral availability is an additional key factor of credit rationing. 7. The econometric analysis of output supply supports the earlier finding that more than 40 percent of borrowers experienced pronounced credit rationing by rural banks. These farms display a marginal willingness to pay for credit of on average 209 percent net of principal. The willingness to pay is significantly different from individual interest rates for credit that account for loan specific transaction costs. These individual interest rates are 13 percent per annum on average. Transaction costs, however, do not ex-post rationalise a withdrawal of loan applications and cannot be regarded as the ultimate cause of perceived credit rationing. In the group of credit-rationed farms, household characteristics are proven to have a significant effect on output supply. This is evidence for a violation of separability between production and consumption decisions and thus lends empirical support to the existence of a market imperfection. A counterfactual model estimated on all short-term credit recipients demonstrates that the willingness to pay is substantially higher for rationed than for non-rationed farm households. 8. An ex-post evaluation of investment activities suggests that non-productive investment rank high on the priority list of interviewed farmers. Residential buildings and automobile purchases are the two items with the largest share of farm-individual investment expenses in the reporting period. The econometric investment analysis demonstrates that credit access is a significant factor of investment decisions of credit-rationed farmers. This supports the theoretical prediction of a financial constraint model of investment behaviour and is consistent with the qualitative self-classification of respondents. Furthermore, the analysis substantiates the evidence that subsidised credit funds are partly diverted to non-productive purposes. In various specifications of the credit-investment relationship, the marginal effect of credit on productive investment is clearly smaller than one. Based on a cubic Tobit estimate of the investment function, the mean of the farm-individual marginal effects is at .53 on average. Every second borrower invests less in productive assets than he borrows. Only 1.6 percent of the selected respondents with positive investment display farm-individual credit effects larger than one. Over the observed range of credit volumes, the marginal effect increases with an increasing credit volume. However, the results do not support the view that investment is positively related to farm size. In summary, the analysis provides evidence that credit rationing is a relevant phenomenon in rural Poland. A significant fraction of borrowers could substantially increase their productivity if access to working capital were improved. However, the examination of long-term loans revealed that farmers often prefer the investment in non-productive assets to growth investment. Credit rationing hence is unlikely to be the ultimate constraint for modernisation and structural change in the Polish farm sector. Government intervention in its current form has clearly failed to eliminate credit rationing, and the targeting of state sponsored funds turns out to be rather dubious. An alternative government policy should aim to improve the general creditworthiness of prospective borrowers and address the causes of loan default in the past that led to a poor reputation of certain borrowers. Policy action that improves the access to working capital should be given priority. One of the potential side-effects of the introduction of direct payments under the CAP could be to relax exactly this constraint on working capital for currently credit-rationed farm households. Beyond a further integration of theory and empirics in the area of New Institutional Economics, an important focus of future research should be the development of analytical tools for practical policy advice on markets with pervasive agency relations. With regard to Poland, political aspects of governmental credit market intervention as well as a more comprehensive analysis of the determinants of structural change in the farming sector appear to be promising research fields.