Information and Enforcement in Informal Credit Markets
AbstractWe study the problem of loan enforcement in an informal credit market where credit histories of borrowers are not available to lenders, raising the possibility of serial default. We show that if there is critical minimum proportion of natural defaulters in the populatin, then there exists an unique equilibrium constituted by certain simple "behavior rules" for lenders and borrowers. This equilibrium always takes the form that lenders advance limited amount of credit (possibly at higher interest rates) to first time borrowers; credit limits are relaxed and the relationship continued, conditional on repayment. We call this phenomenon micro-rationing. We also introduce the possibility of macro-rationing - at every date, the exclusion of some borrowers from any source of credit (similar to involuntary unemployment, a la Shapiro and Stiglitz (1984)). We observe (i) if both kinds of rationing are allowed, an unique equilibrium in simple, stationary strategies always exists (ii) micro-rationing is always rpesent in equilibrium (iii) macro-rationing arises if the proportion of natural defaulters in the market is below a certain threshold. Some comparative static properties of changes in the composition of borrowers are also derived. Finally, we show that if lenders had the option of privately collecting information on the credit histories of new clients at a cost, multiple equilibria could arise for intermediate values of such costs. We thus interpret limited client information in informal credit markets as a possible outcome of coordination failure among moneylenders.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 93.
Date of creation: Apr 1999
Date of revision:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ulrike Vogelgesang, 2001.
"Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior,"
GK working paper series
2001-06, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised Nov 2001.
- Vogelgesang, Ulrike, 2003. "Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior," World Development, Elsevier, vol. 31(12), pages 2085-2114, December.
- Brown, M. & Serra Garcia, M., 2010. "Relational Contracting Under the Threat of Expropriation – Experimental Evidence," Discussion Paper 2010-85, Tilburg University, Center for Economic Research.
- Alexander Tedeschi, Gwendolyn, 2006. "Here today, gone tomorrow: Can dynamic incentives make microfinance more flexible?," Journal of Development Economics, Elsevier, vol. 80(1), pages 84-105, June.
- Dean Karlan & Jonathan Zinman, 2009.
"Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment,"
Econometric Society, vol. 77(6), pages 1993-2008, November.
- Dean S. Karlan & Jonathan Zinman, 2005. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," Working Papers 911, Economic Growth Center, Yale University.
- Dean Karlan & Jonathan Zinman, 2005. "Observing unobservables: identifying information asymmetries with a consumer-credit field experiment," Proceedings 961, Federal Reserve Bank of Chicago.
- Dean Karlan & Jonathan Zinman, 2004. "Observing unobservables: Identifying information asymmetries with a consumer credit field experiment," Natural Field Experiments 00283, The Field Experiments Website.
- Karlan, Dean S. & Zinman, Jonathan, 2007. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," CEPR Discussion Papers 6182, C.E.P.R. Discussion Papers.
- Dorothea Schäfer & Boriss Siliverstovs & Eva Terberger, 2005.
"Banking Competition, Good or Bad?: The Case of Promoting Micro and Small Enterprise Finance in Kazakhstan,"
Discussion Papers of DIW Berlin
479, DIW Berlin, German Institute for Economic Research.
- Dorothea Schafer & Boriss Siliverstovs & Eva Terberger, 2010. "Banking competition, good or bad? The case of promoting micro and small enterprise finance in Kazakhstan," Applied Economics, Taylor and Francis Journals, vol. 42(6), pages 701-716.
- repec:ebl:ecbull:v:4:y:2007:i:37:p:1-7 is not listed on IDEAS
- Eva Terberger, 2005. "Die Struktur des Finanzsystems und der Finanzierungszugang für kleine Unternehmen," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(4), pages 75-91.
- repec:fip:fedhpr:y:2005:i:apr:x:12 is not listed on IDEAS
- Brown, Martin & Serra-Garcia, Marta, 2011. "Debt Enforcement and Relational Contracting," Discussion Papers in Economics 12287, University of Munich, Department of Economics.
- Gine, Xavier, 2005. "Access to capital in rural Thailand : an estimated model of formal versus informal credit," Policy Research Working Paper Series 3502, The World Bank.
- Giné, Xavier, 2011. "Access to capital in rural Thailand: An estimated model of formal vs. informal credit," Journal of Development Economics, Elsevier, vol. 96(1), pages 16-29, September.
- Marco Di Maggio, 2007. "Information sharing in emerging credit markets," Economics Bulletin, AccessEcon, vol. 4(37), pages 1-7.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.