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Interest-Free Loans between Villagers

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Author Info

  • Loren Brandt
  • Arthur J. Hosios

Abstract

Interest-free loans are a common feature of low-income rural economies. In much of the economics literature, lending at zero and positive interest are viewed as being highly segmented in the community, with interest-free loans an essential component of long-term mutual consumption agreements between households. An alternative interpretation is that zero-interest loans are a credit contract that, in lieu of interest, includes an option allowing the lender to tax the borrower at a future date. This option can take a variety of forms, including the provision of labor or draft animal services or possibly a future loan. In this paper, we develop and test a model of household contract choice between zero- and positive-interest rate loans that builds on this alternative perspective. It highlights the role of borrower and lender attributes and the economic environment in which they interact in determining contract choice. Enforcement considerations are secondary. We use a unique household-level data set for rural China for the mid-1930s to examine key predictions of the model. (c) 2010 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 58 (2010)
Issue (Month): 2 (01)
Pages: 345-372

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Handle: RePEc:ucp:ecdecc:v:58:y:2010:i:2:p:345-372

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Web page: http://www.journals.uchicago.edu/EDCC/

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Cited by:
  1. Brandt, Loren & Ma, Debin & Rawski, Thomas, 2013. "From Divergence to Convergence: Re-evaluating the History Behind China’s Economic Boom," CAGE Online Working Paper Series 117, Competitive Advantage in the Global Economy (CAGE).
  2. Mallick, Debdulal, 2009. "How effective is a Big Push to the Small? Evidence from a Quasi-random Experiment," MPRA Paper 22824, University Library of Munich, Germany.
  3. Dezső, Linda & Loewenstein, George, 2012. "Lenders’ blind trust and borrowers’ blind spots: A descriptive investigation of personal loans," Journal of Economic Psychology, Elsevier, vol. 33(5), pages 996-1011.

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