Capacity-constrained Collusive Price Discrimination in the Informal Rural Credit Markets of Nepal

The author tests two alternative models of price determination in informal rural credit markets, using LSMS data from Nepal. Strong support is found for a capacity-constrained collusive oligopoly model, where lenders have full information about actual borrowers and charge heterogeneous interest rates. Only marginal support is found for a competitive cost-pricing model with imperfect information. Interest rates vary with the observable characteristics of caste, installment period, and geographical region; and they decrease as village lending capacity increases up to a certain level. Interest rates do not depend on risk related variables such as land value and loan size.