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Risk, Wealth, and Sectoral Choice in Rural Credit Markets
Author(s) -
Boucher Steve,
Guirkinger Catherine
Publication year - 2007
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.1467-8276.2007.01009.x
Subject(s) - collateral , informal sector , consumption smoothing , spillover effect , incentive , business , consumption (sociology) , developing country , economics , labour economics , monetary economics , microeconomics , finance , market economy , economic growth , business cycle , macroeconomics , social science , sociology
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.