Informal Finance: A Theory of Moneylenders

Andreas Madestam

No 347, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: I study 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 model implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions raise 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.

Date: 2008
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Related works:
Journal Article: Informal finance: A theory of moneylenders (2014)
Working Paper: Informal Finance: A Theory of Moneylenders (2009)
Working Paper: Informal Finance: A Theory of Moneylenders (2009)
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