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Formal Credit, Corruption and the Informal Credit Market in Agriculture: a Theoretical Analysis

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  • Manash Ranjan Gupta
  • Sarbajit Chaudhuri

Abstract

The paper presents a theory of interest rate determination on informal credit in backward agriculture when there is a market for formal credit. The farmer has to bribe the official of the formal credit agency in order to get formal credit. The official and the moneylender play a non‐cooperative game in choosing the amount of formal credit and the informal interest rate, respectively. The informal‐sector interest rate and the effective formal‐sector interest rate (incorporating the bribe) are equal in equilibrium. A reduction in the formal interest rate and/or an increase in the price of the product may lead to an increase in the equilibrium bribing rate and the informal interest rate when the formal credit and the informal credit are complementary to each other.

Suggested Citation

  • Manash Ranjan Gupta & Sarbajit Chaudhuri, 1997. "Formal Credit, Corruption and the Informal Credit Market in Agriculture: a Theoretical Analysis," Economica, London School of Economics and Political Science, vol. 64(254), pages 331-343, May.
    • Handle: RePEc:bla:econom:v:64:y:1997:i:254:p:331-343
    DOI: 10.1111/1468-0335.00081
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    Cited by:

    1. Augendra Bhukuth & Jérôme Ballet & Katia Radja, 2018. "An Analysis of Social Proximity and Interest Rate in Rural South India," Post-Print hal-01877007, HAL.

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