Risk, wealth, and sectoral choice in rural credit markets

Steve Boucher, Catherine Guirkinger

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Abstract

We model the role of the informal credit sector in developing countries. The informational advantage of informal lenders is portrayed as the ability to monitor borrowers. Monitoring reduces the incentive problem and allows for contracts with lower collateral. This enables informal lenders to serve both individuals who cannot post the collateral required by the formal sector and those who are able but do not want to post collateral. The model is consistent with the conventional view of the informal sector as recipient of spillover demand from the formal sector. It also shows that the informal sector may provide partial insurance as the lower collateral requirement implies greater consumption smoothing for borrowers. © 2007 American Agricultural Economics Association.

Original languageEnglish
Pages (from-to)991-1004
Number of pages14
JournalAmerican Journal of Agricultural Economics
Volume89
Issue number4
DOIs
Publication statusPublished - Nov 2007

Keywords

  • Credit rationing
  • Informal credit
  • Informal sector
  • Moral hazard
  • Risk rationing

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