Formal and informal sector credit institutions and interlinkage

Chakrabarty, D. and Chaudhuri, A. (2001) Formal and informal sector credit institutions and interlinkage. Journal of Economic Behavior and Organization, 46 (3). pp. 313-325.

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Nationalized banks in poor countries often ration rural credit. This creates demand for loans from monopolistic landlord/moneylenders who often interlink credit and product contracts allowing the latter to extract more of the tenant’s consumer surplus. In the presence of asymmetric information such arrangements can be inefficient. We find that increasing the fixed credit allocation to the rural sector at a subsidized rate does not reduce that inefficiency. The entire benefit of the subsidy is extracted by the moneylender. An alternative policy of providing credit at subsidized rates but in a flexible manner is more effective in reducing the inefficiency

Item Type: Article
Uncontrolled Keywords: Credit markets; Adverse selection; Formal sector; Informal sector; Interlinked contracts
Author Affiliation: Rutgers University, New Brunswick, NJ 08903, USA
Subjects: Social Sciences
Divisions: General
Depositing User: Ms K Syamalamba
Date Deposited: 11 Mar 2014 07:54
Last Modified: 11 Mar 2014 07:54
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