Articlehybrid2013

Informal finance: A theory of moneylenders

145 citations0/0 files storedJournal of Development Economics

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Microfinance and Financial Inclusion Banking stability, regulation, efficiency Economic theories and models

Abstract

I present a model that analyzes 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 theory implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions increase 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.

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References

1998Law and Finance 1987The Economic Institutions of Capitalism 1954Economic Development with Unlimited Supplies of Labour 1986The Economic Institutions of Capitalism 1997Legal Determinants of External Finance 2019Economic Growth and Income Inequality 2000The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else 1995Firms, Contracts, and Financial Structure

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