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International factor mobility, informal interest rate and capital market imperfection: A general equilibrium analysis

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  • Chaudhuri, Sarbajit
  • Gupta, Manash Ranjan

Abstract

This paper makes an attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 37 (2014)
Issue (Month): C ()
Pages: 184-192

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Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:184-192

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Informal credit; Formal credit; Moneylender; Foreign capital; Emigration; General equilibrium;

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References

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Cited by:
  1. Chaudhuri, Sarbajit & Roychowdhury, Somasree, 2014. "Economic Reforms and Gender-based Wage Inequality in the Presence of Factor Market Distortions," MPRA Paper 54111, University Library of Munich, Germany.

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