The Insurance Premium in the Interest Rates of Interlinked Loans in a Small-scale Fishery

Marie-Catherine Riekhof

No 16/264, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Interest payments based on income flows are a common feature of informal loans. Such so-called `interlinked loans' can be seen as an insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that on average, lenders receive 25% of the income, which corresponds to an average interest rate of 49% p.a.. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.

Keywords: Interlinked loan; Insurance premium; Interest rate; Small-scale fishery; Informal insurance; Informal credit markets; Interlinked contracts; Risk-sharing; India (search for similar items in EconPapers)
JEL-codes: H23 O16 O17 O31 Q22 Q54 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-12
New Economics Papers: this item is included in nep-ias and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The insurance premium in the interest rates of interlinked loans in a small-scale fishery (2019)
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