Informal finance: A theory of moneylenders

Madestam, A. (2014) Informal finance: A theory of moneylenders. Journal of Development Economics, 107. pp. 157-174.

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I present a model that analyzes the coexistence of formal and informal finance in underdeveloped credit markets. Formal banks have access to unlimited funds but are unable to control the use of credit. Informal lenders can prevent non-diligent behavior but often lack the needed capital. The theory implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions increase the prevalence of informal finance in some markets and reduce it in others, why financial market segmentation persists, and why informal interest rates can be highly variable within the same sub-economy

Item Type: Article
Uncontrolled Keywords: Credit markets; Financial development; Institutions; Market structure
Author Affiliation: Department of Economics, Stockholm University, Sweden
Subjects: Social Sciences
Divisions: General
Depositing User: Ms K Syamalamba
Date Deposited: 06 Mar 2014 07:24
Last Modified: 06 Mar 2014 07:26
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