Informal Credit in Village Economies: Contract Duration with Personal and Community Enforcement
This paper provides an explanation for several important features of informal credit contracts negotiated in economies where households lack collateral, and ready access to legal authorities and formal financial institutions is absent. Our analysis highlights the choice between loans with well-defined repayment periods (fixed durations) and those that are open-ended (no duration). We argue that households negotiate fixed- duration loans only when the borrower's ability to repay is private information, and borrowers enjoy non-credit (social) exchanges with lenders that can be withdrawn to encourage loan repayment. Other differences in loan terms can be explained by the exclusive availability of collective loan enforcement to lenders and borrowers residing in the same community. Drawing on a unique household-level survey, we find empirical support for our model's explanation for duration and the size of loans, as well as borrower's repayment behavior. Our analysis also highlights a negative externality among informal personal and community enforcement mechanisms whereby the availability of both mechanisms in the same village reduces the payments that can be credibly promised with either one.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fafchamps, Marcel, 1992. "Solidarity Networks in Preindustrial Societies: Rational Peasants with a Moral Economy," Economic Development and Cultural Change, University of Chicago Press, vol. 41(1), pages 147-174, October.
- John McMillan & Christopher Woodruff, 1999.
"Interfirm Relationships and Informal Credit in Vietnam,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 114(4), pages 1285-1320.
- McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
- John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
- Jeremy A.Rogoff Bulow & Kenneth, 1986.
"A Constant Recontracting Model of Sovereign Debt,"
University of Chicago - George G. Stigler Center for Study of Economy and State
43, Chicago - Center for Study of Economy and State.
- Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
- Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
- Marcel Fafchamps & Susan Lund, .
"Risk Sharing Networks in Rural Philippines,"
97014, Stanford University, Department of Economics.
- Jonathan Levin, 2002. "Multilateral Contracting and the Employment Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1075-1103.
- Besley, T., 1993.
"Savings, Credit and Insurance,"
167, Princeton, Woodrow Wilson School - Development Studies.
- Robert M. Townsend, 1995. "Financial Systems in Northern Thai Villages," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1011-1046.
- Udry, Christopher, 1990. "Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy," World Bank Economic Review, World Bank Group, vol. 4(3), pages 251-69, September.
- Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-950, October.
- Michihiro Kandori, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 63-80.
- Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
- Christopher Udry, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 495-526.
- Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report 209, Federal Reserve Bank of Minneapolis.
- Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwple:0410001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.