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


  • Basab Dasgupta

    (Poverty Reduction and Economic Management (PRMPR), The World Bank Group, Washington, DC, USA.)


In a dynamic general equilibrium framework with heterogeneous firms, this study analyzes the importance of informal credit markets in financial development and growth. By drawing instances from informal market we show that informal loans reduce the cost of credit constraints under regulated regime for small loans and foster growth by 1.1 percent. This higher growth rate can be attributed to the ability of the informal market to separate the high risk from the low risk firms due to their informational advantage. Following similar principle, we propose an alternative lending mechanism for banks and show that the formal sector can also achieve the same advantage if they follow an incentive based pricing mechanism. We show that an even higher growth path can be achieved by small enterprises when banks distinguish between high and low risk firms and set the price accordingly. With the help of household level data, the quantification of our model for India suggests that revelation of firms' type under our proposed regime can improve growth rate by 1.5 percent as compared to the existing regulated regime.

Suggested Citation

  • Basab Dasgupta, 2009. "Endogenous Growth in the Presence of Informal Credit Markets in India: A Comparative Analysis Between Credit Rationing and Self-Revelation Regimes," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 44(1), pages 21-48, July.
  • Handle: RePEc:dse:indecr:v:44:y:2009:i:1:p:21-48

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    References listed on IDEAS

    1. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
    2. William James Adams, 2006. "Markets: Beer in Germany and the United States," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 189-205, Winter.
    3. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
    4. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92.
    5. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Credit Rationing; Informal Credit Markets; Self Revelation Mechanism;

    JEL classification:

    • 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
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy


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