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Vertical Linkage between Formal and Informal Credit Markets, Corruption and Credit Subsidy policy: A Note

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  • Chaudhuri, Sarbajit
  • Ghosh Dastidar, Krishnendu

Abstract

We develop a model of vertical linkage between the formal and informal credit markets which highlights the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit, it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. However, an anticorruption measure (increase in penalty) unambiguously lowers the interest rate in the informal credit market. Finally, we examine the effects of alternative policies on the incomes of different economic agents in our model.

Suggested Citation

  • Chaudhuri, Sarbajit & Ghosh Dastidar, Krishnendu, 2014. "Vertical Linkage between Formal and Informal Credit Markets, Corruption and Credit Subsidy policy: A Note," MPRA Paper 53344, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53344
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    References listed on IDEAS

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    1. Hoff, Karla & Stiglitz, Joseph E., 1998. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 55(2), pages 485-518, April.
    2. Chaudhuri, Sarbajit & Dastidar, Krishnendu Ghosh, 2011. "Corruption in a model of vertical linkage between formal and informal credit sources and credit subsidy policy," Economic Modelling, Elsevier, vol. 28(6), pages 2596-2599.
    3. Chaudhuri, Sarbajit & Gupta, Manash Ranjan, 1996. "Delayed formal credit, bribing and the informal credit market in agriculture: A theoretical analysis," Journal of Development Economics, Elsevier, vol. 51(2), pages 433-449, December.
    4. Braverman, Avishay & Guasch, J. Luis, 1986. "Rural credit markets and institutions in developing countries: Lessons for policy analysis from practice and modern theory," World Development, Elsevier, vol. 14(10-11), pages 1253-1267.
    5. Gupta, Manash Ranjan & Chaudhuri, Sarbajit, 1997. "Formal Credit, Corruption and the Informal Credit Market in Agriculture: A Theoretical Analysis," Economica, London School of Economics and Political Science, vol. 64(254), pages 331-343, May.
    6. Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, vol. 56(2), pages 265-280, August.
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    Cited by:

    1. Chaudhuri, Sarbajit & Gupta, Manash Ranjan, 2013. "Endogenous Capital Market Imperfection, Informal Interest Rate Determination and International Factor mobility in a General Equilibrium Model," MPRA Paper 51157, University Library of Munich, Germany.

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    More about this item

    Keywords

    Formal/informal credit markets; informal interest rate; corruption; credit subsidy policy; anticorruption measures;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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