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

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Author Info
Gupta, Manash Ranjan
Chaudhuri, Sarbajit

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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. Copyright 1997 by The London School of Economics and Political Science

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Publisher Info
Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 64 (1997)
Issue (Month): 254 (May)
Pages: 331-43
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Handle: RePEc:bla:econom:v:64:y:1997:i:254:p:331-43

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  1. Sarbajit Chaudhuri, 2005. "Interactions Between Two Informal Sector Lenders And Interest Rate Determination In The Informal Credit Market: A Theoretical Analysis," Game Theory and Information 0511003, EconWPA. [Downloadable!]
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  2. Sarbajit Chaudhuri, 2005. "Interaction Of Formal And Informal Credit Markets In Backward," Game Theory and Information 0511001, EconWPA. [Downloadable!]
  3. Soumyen Sikdar & Sarbajit Chaudhuri, 2005. "A Model Of Corruption In An Investment Project," Public Economics 0510020, EconWPA. [Downloadable!]
  4. Mikkel Barslund & Finn Tarp, 2007. "Formal and Informal Rural Credit in Four Provinces of Vietnam," Discussion Papers 07-07, University of Copenhagen. Department of Economics. [Downloadable!]
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