Does formal financial development crowd in informal financing? Evidence from Chinese private enterprises

Liming Hou, Shao-Chieh Hsueh and Shuoxun Zhang

Economic Modelling, 2020, vol. 90, issue C, 288-301

Abstract: The relationship between formal and informal finance is uncertain. They serve as substitute for high-quality borrowers but are complement for low-quality borrowers. As formal financial institutions expand, they may concentrate on high-quality borrowers or diversify among borrowers of different qualities. Using unique survey data from Chinese private firms, we are allowed to investigate the relationship for a group of borrowers who were considered as low-quality. We find that formal financial development imposes a crowd-in effect for private firms’ informal financing, especially in East China. There is heterogeneity between East and West China. We document that the crowd-in effect is greater for private firms with bank access or of large size.

Keywords: Informal finance; Formal finance; Crowd out; Crowd in; Financial development (search for similar items in EconPapers)
JEL-codes: D00 G20 G21 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:90:y:2020:i:c:p:288-301

DOI: 10.1016/j.econmod.2020.05.015

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