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Formal Credit, Corruption and the Informal Credit Market in Agriculture: a Theoretical Analysis
Author(s) -
Gupta Manash Ranjan,
Chaudhuri Sarbajit
Publication year - 1997
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00081
Subject(s) - language change , agriculture , economics , bond market , credit history , financial system , business , monetary economics , art , literature , ecology , biology
The paper presents a theory of interest rate determination on informal credit in backward agriculture when there is a market for formal credit. The farmer has to bribe the official of the formal credit agency in order to get formal credit. The official and the moneylender play a non‐cooperative game in choosing the amount of formal credit and the informal interest rate, respectively. The informal‐sector interest rate and the effective formal‐sector interest rate (incorporating the bribe) are equal in equilibrium. A reduction in the formal interest rate and/or an increase in the price of the product may lead to an increase in the equilibrium bribing rate and the informal interest rate when the formal credit and the informal credit are complementary to each other.