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Endogenous Growth in the Presence of Informal Credit Markets: A Comparative Analysis Between Credit Rationing and Self-Revelation Regimes

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  • Basab Dasupta

    (University of Connecticut)

Abstract

This paper examines whether the presence of informal credit markets reduces the cost of credit rationing in terms of growth. In a dynamic general equilibrium framework, we assume that firms are heterogenous with different degrees of risk and households invest in human capital development. With the help of Indian household level data we show that the informal market reduces the cost of rationing by increasing the growth rate by 0.7 percent. This higher growth rate, in the presence of an informal sector, is due to the ability of the informal market to separate the high risk from the low risk firms thanks to better information. But even after such improvement we do not get the optimum outcome. The findings, based on our second question, suggest that the revelation of firms' type, based on incentive compatible pricing, can lead to almost 2 percent higher growth rate as compared to the credit rationing regime with informal sector.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-18.

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Length: 41 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:uct:uconnp:2005-18

Note: I am really grateful to my advisor, Christian Zimmermann for his guidance and valuable comments. I am also indebted to Prof. Samar K. Datta, IIMA, India. Usual disclaimer applies.
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Keywords: credit rationing; informal credit markets; self revelation mechanism;

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  1. Bell, Clive, 1990. "Interactions between Institutional and Informal Credit Agencies in Rural India," World Bank Economic Review, World Bank Group, World Bank Group, vol. 4(3), pages 297-327, September.
  2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
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  14. basab dasgupta, 2005. "Capital Accumulation in the Presence of Informal Credit Contract: Does Incentive Mechanism Work Better than Credit Rationing Under Asymmetric Information?," Computing in Economics and Finance 2005, Society for Computational Economics 366, Society for Computational Economics.
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Cited by:
  1. Nicoletta Batini & Young-Bae Kim & Paul Levine & Emanuela Lotti, 2009. "Informal Labour and Credit Markets: A Survey," School of Economics Discussion Papers, School of Economics, University of Surrey 0609, School of Economics, University of Surrey.

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