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Why Do Formal Credit, Informal Credit, and both Types of Credits Coexist as Consumer Choices?

Jorge Luis Garcia (), Sonia Digiannatale () and Victor Carreon ()
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Sonia Digiannatale: CIDE, MEXICO
Victor Carreon: CIDE, MEXICO

Authors registered in the RePEc Author Service: Sonia B. Di Giannatale

Economics Bulletin, 2015, vol. 35, issue 1, 89-96

Abstract: We analyze why formal credit, informal credit, and both types of credits coexist as consumer choices. We construct a model in which the households pay a fixed cost to access each type of market and face a market particular interest rate. The model induces a cost curve that defines an optimal, systematic sorting into credit types. The cost curve establishes that it is optimal to have informal credit when credits are small and formal credit when credits are relatively large. When using an intermediate amount of credit, the household finds it optimal to have both types of credits. After presenting the model, we use data from a pseudo-experimental, exogenous price variation spanned by a governmental intervention in Mexico to test the parametrization of the model and quantify comparative statics exercises arising from it.

Keywords: formal credit market; informal credit market; optimal cost curve; credit market sorting. (search for similar items in EconPapers)
JEL-codes: D1 G2 (search for similar items in EconPapers)
Date: 2015-03-11
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