Risk, Wealth, and Sectoral Choice in Rural Credit Markets |
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| Authors: | Steve Boucher Catherine Guirkinger |
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| Institution: | Steve Boucher is assistant professor of Agricultural and Resource Economics at the University of California, Davis and a member of the Giannini Foundation of Agricultural Economics. Catherine Guirkinger is assistant professor of Economics at the University of Namur in Belgium and a member of the Center for Research in Economic Development at the University of Namur. |
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| Abstract: | We model the role of the informal credit sector in developing countries. The informational advantage of informal lenders is portrayed as the ability to monitor borrowers. Monitoring reduces the incentive problem and allows for contracts with lower collateral. This enables informal lenders to serve both individuals who cannot post the collateral required by the formal sector and those who are able but do not want to post collateral. The model is consistent with the conventional view of the informal sector as recipient of spillover demand from the formal sector. It also shows that the informal sector may provide partial insurance as the lower collateral requirement implies greater consumption smoothing for borrowers. |
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| Keywords: | credit rationing informal credit informal sector moral hazard risk rationing |
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