Corruption in a Model of Vertical Linkage between Formal and Informal Credit Sources and Credit Subsidy Policy

Sarbajit Chaudhuri and Krishnendu Dastidar

MPRA Paper from University Library of Munich, Germany

Abstract: The present paper 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 moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. An anticorruption measure, on the contrary, may be counterproductive and raise the interest rate in the informal credit market.

Keywords: formal/informal credit markets; interest rates (search for similar items in EconPapers)
JEL-codes: O16 O17 (search for similar items in EconPapers)
Date: 2009-05-15
New Economics Papers: this item is included in nep-mfd and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Corruption in a model of vertical linkage between formal and informal credit sources and credit subsidy policy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:18006

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