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Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis

Author

Listed:
  • Chaudhuri, Sarbajit
  • Dwibedi, Jayanta

Abstract

The paper shows that the policy of forging a vertical linkage between the formal and informal credit markets is distinctly superior to the existing credit policy of horizontally substituting the informal sector by the formal one. An inflow of subsidized formal credit to the informal lenders not only ensures better terms of borrowing to the small borrowers but also leads to higher agricultural productivity vis-à-vis the horizontal linkage case. Even if the informal sector lenders are allowed to collude, the informal interest rate is still lower in the vertical linkage case.

Suggested Citation

  • Chaudhuri, Sarbajit & Dwibedi, Jayanta, 2014. "Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis," MPRA Paper 55666, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55666
    as

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    File URL: https://mpra.ub.uni-muenchen.de/55666/1/MPRA_paper_55666.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Lele, Uma, 1981. "Co-operatives and the poor: A comparative perspective," World Development, Elsevier, vol. 9(1), pages 55-72, January.
    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. Mishra, Ajit, 1994. "Clientelization and fragmentation in backward agriculture: Forward induction and entry deterrence," Journal of Development Economics, Elsevier, vol. 45(2), pages 271-285, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Formal credit; informal credit; horizontal linkage; vertical linkage; moneylender; collusion.;

    JEL classification:

    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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