Information and Enforcement in Informal Credit Markets

Parikshit Ghosh and Debraj Ray

Economica, 2016, vol. 83, issue 329, 59-90

Abstract: type="main" xml:id="ecca12169-abs-0001">

We study loan enforcement in informal credit markets with multiple lenders but no sharing of credit histories, and derive the dynamics of loan size and interest rates for relational lending. In the presence of a sufficient fraction of ‘natural defaulters’, the rest of the market can be incentivized against default by micro-rationing—sharper credit limits and possibly higher interest rates that serve as gateways into new borrowing relationships. When there are too few natural defaulters in the market, this can be supplemented by macro-rationing—random exclusion of some borrowers. When information collection is endogenized, multiple equilibria may arise.

Date: 2016
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Working Paper: Information and Enforcement in Informal Credit Markets (1999)
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