 Corruption in a model of vertical linkage between formal and informal credit sources and credit subsidy policySarbajit Chaudhuri and Krishnendu Dastidar Economic Modelling, 2011, vol. 28, issue 6, 2596-2599 Abstract: The present note develops a model of vertical linkage between the formal and informal credit markets highlighting the presence of corruption in the distribution of formal credit. The existing dominant moneylender, the bank official and the new moneylenders move sequentially. The existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. We show that there may arise a case where an increase in the supply of formal credit results in an increase in the informal interest rate under reasonable parametric restrictions. This shows that apart from (i) asymmetric information on the part of informal sector lenders (Bose, 1998), (ii) an increase in the probability of default of all informal sector lenders (Hoff and Stiglitz 1997), and the (iii) possibility of informal lenders to collude (Floro and Ray 1997), the presence of corruption in the distribution of formal credit might be another factor responsible for the policy of vertical linkage to break down. Keywords: Formal/informal credit markets; Interest rates Journal of Economic Literature (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:6:p:2596-2599 DOI: 10.1016/j.econmod.2011.07.021 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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