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Informal finance: A theory of moneylenders
Stockholm University, Faculty of Social Sciences, Department of Economics.
2014 (English)In: Journal of Development Economics, ISSN 0304-3878, Vol. 107, 157-174 p.Article in journal (Refereed) Published
Abstract [en]

I present a model that analyzes the coexistence of formal and informal finance in underdeveloped credit markets. Formal banks have access to unlimited funds but are unable to control the use of credit. Informal lenders can prevent non-diligent behavior but often lack the needed capital. The theory implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions increase the prevalence of informal finance in some markets and reduce it in others, why financial market segmentation persists, and why informal interest rates can be highly variable within the same sub-economy.

Place, publisher, year, edition, pages
2014. Vol. 107, 157-174 p.
Keyword [en]
Credit markets, Financial development, Institutions, Market structure
National Category
URN: urn:nbn:se:su:diva-103312DOI: 10.1016/j.jdeveco.2013.11.001ISI: 000333489300012OAI: diva2:717554


Available from: 2014-05-15 Created: 2014-05-12 Last updated: 2014-05-15Bibliographically approved

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Madestam, Andreas
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