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Friendship and money, oil and water? Credit constraints and "Family and Friends" finance

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  • Wiegand, Manuel

Abstract

The use of informal finance is primarily discussed in the context of developing countries and start-up businesses. Survey data used in this study, however, shows that ``Family and Friends'' (F\&F) finance is also remarkably widespread among established firms in Germany, a highly developed country. Establishing a causal link, Instrumental Variables estimations in this study show that firms use F\&F finance in response to credit constraints. Considering that welfare gains from financial intermediation no longer materialize when firms go informal, this result is of utmost importance in the analysis of the consequences of a non-functioning financial system, even in developed economies.

Suggested Citation

  • Wiegand, Manuel, 2015. "Friendship and money, oil and water? Credit constraints and "Family and Friends" finance," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112965, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:112965
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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