Endogenous Growth in the Presence of Informal Credit Markets: A Comparative Analysis Between Credit Rationing and Self-Revelation Regimes

Basab Dasgupta ()

No 2005-18, Working papers from University of Connecticut, Department of Economics

Abstract: This paper examines whether the presence of informal credit markets reduces the cost of credit rationing in terms of growth. In a dynamic general equilibrium framework, we assume that firms are heterogenous with different degrees of risk and households invest in human capital development. With the help of Indian household level data we show that the informal market reduces the cost of rationing by increasing the growth rate by 0.7 percent. This higher growth rate, in the presence of an informal sector, is due to the ability of the informal market to separate the high risk from the low risk firms thanks to better information. But even after such improvement we do not get the optimum outcome. The findings, based on our second question, suggest that the revelation of firms' type, based on incentive compatible pricing, can lead to almost 2 percent higher growth rate as compared to the credit rationing regime with informal sector.

Keywords: credit rationing; informal credit markets; self revelation mechanism (search for similar items in EconPapers)
JEL-codes: E26 O16 O17 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2005-06
New Economics Papers: this item is included in nep-dev, nep-dge and nep-ent
Note: I am really grateful to my advisor, Christian Zimmermann for his guidance and valuable comments. I am also indebted to Prof. Samar K. Datta, IIMA, India. Usual disclaimer applies.
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Citations: View citations in EconPapers (1)

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