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Informal Credit Markets, Interlinkage and Migration

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  • Yasmeen Khwaja

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    Abstract

    This paper develops a model of interlinkage in the credit market and labor market. A credit-cum-labor contract provides the necessary funds to undertake an investment in migration, given the absence of sufficient collateral. The optimal interlinked contract eliminates the scope for strategic default. The result shows that the very presence of inequality is a necessary condition for migration to take place. This could explain the apparent paradox of why poor households in villages where asset distribution is very skewed are more likely to migrate than households in poorer villages with less unequal asset distribution.

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    Bibliographic Info

    Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 02-23.

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    Length: 28 pages
    Date of creation: Jul 2002
    Date of revision:
    Handle: RePEc:bru:bruppp:02-23

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    Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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    1. Braverman, Avishay & Srinivasan, T. N., 1981. "Credit and sharecropping in agrarian societies," Journal of Development Economics, Elsevier, vol. 9(3), pages 289-312, December.
    2. Mitra, Pradeep K., 1983. "A theory of interlinked rural transactions," Journal of Public Economics, Elsevier, vol. 20(2), pages 167-191, March.
    3. Chang, Chun, 1990. "The dynamic structure of optimal debt contracts," Journal of Economic Theory, Elsevier, vol. 52(1), pages 68-86, October.
    4. Chakrabarty, Debajyoti & Chaudhuri, Ananish, 2001. "Formal and informal sector credit institutions and interlinkage," Journal of Economic Behavior & Organization, Elsevier, vol. 46(3), pages 313-325, November.
    5. Banerji, Sanjay, 1995. "Interlinkage, investment and adverse selection," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 11-21, September.
    6. Stiglitz, J.E., 1988. "Sharecropping," Papers 11, Princeton, Woodrow Wilson School - Discussion Paper.
    7. Bell, Clive, 1988. "Credit markets and interlinked transactions," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 16, pages 763-830 Elsevier.
    8. Basu, Kaushik & Bell, Clive & Bose, Pinaki, 2000. "Interlinkage, limited liability and strategic interaction," Journal of Economic Behavior & Organization, Elsevier, vol. 42(4), pages 445-462, August.
    9. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    10. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    11. Bhaduri, Amit, 1977. "On the Formation of Usurious Interest Rates in Backward Agriculture," Cambridge Journal of Economics, Oxford University Press, vol. 1(4), pages 341-52, December.
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