Informal finance: A theory of moneylenders

Andreas Madestam

Journal of Development Economics, 2014, vol. 107, issue C, 157-174

Abstract: I present a model that analyzes the coexistence of formal and informal finance in underdeveloped credit markets. Formal banks have access to unlimited funds but are unable to control the use of credit. Informal lenders can prevent non-diligent behavior but often lack the needed capital. The theory implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions increase the prevalence of informal finance in some markets and reduce it in others, why financial market segmentation persists, and why informal interest rates can be highly variable within the same sub-economy.

Keywords: Credit markets; Financial development; Institutions; Market structure (search for similar items in EconPapers)
JEL-codes: D40 O12 O16 O17 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (56)

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Related works:
Working Paper: Informal Finance: A Theory of Moneylenders (2009)
Working Paper: Informal Finance: A Theory of Moneylenders (2009)
Working Paper: Informal Finance: A Theory of Moneylenders (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:107:y:2014:i:c:p:157-174

DOI: 10.1016/j.jdeveco.2013.11.001

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