Income Distribution, Transaction Costs and Market Fragmentation in Informal Credit Markets

Pan A Yotopoulos and Sagrario L Floro

Cambridge Journal of Economics, 1992, vol. 16, issue 3, 303-26

Abstract: In an environment characterized by inequitable wealth distribution and limited market-infrastructural institutions, the trust component of credit transactions is founded on personal relations. Through these, information and transaction costs advantages are provided; but also control and unequal bargaining power can be exercised. In the informal sector, transaction and information costs will lead to non-price closure in credit markets, while behavioral differences in lenders will lead to manipulation of prices as well as of quantities. The quantity-closure rules are modeled and tested for two types of informal lenders in the agricultural sector of the Philippines, the trader-lenders and the farmer-lenders. It is found that the two groups of lenders systematically sort their borrowers and ration credit. Copyright 1992 by Oxford University Press.

Date: 1992
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