Credit Rationing And The Economics Of Informal Lending: Theoretical Results And Econometric Inferences Using The Household Surveys From China And India

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Informal lending and borrowing among close acquaintances such as relatives and friends have been found to be widely prevalent in the rural areas of developing economies, which appears to be a less explored area. This dissertation's main objective is to investigate various pertinent economic issues related with such informal financial transactions. Furthermore, the analytical results are empirically investigated using household survey data from China and India and using appropriate econometric methods and identification strategies. As credit rationing in the formal credit market is one of the important factors that compel these families to engage in informal lending and borrowing, important issues related with this matter has been investigated in detail and useful findings are made. The survey data also reveals that the families in these areas face various types of risks and uncertainties. In absence of adequate access to credit and insurance arrangements often these families enter into mutual risk sharing insurance and credit arrangements. It has been observed that in both the countries more than 70 percent and 90 percent families have engaged in gift and loan transactions respectively in emergencies. This demonstrates that people do share risk on a large scale and moreover preference for loan transaction dominates. This dissertation makes key contribution in exploring the significance of underlying motives for these informal financial transactions. Particularly the significance of various social preferences, apart from risk sharing motive which is exclusively driven by the material gain considerations, has been highlighted. Among these the investigation of the fairness reciprocity, in terms of fairness equilibrium framework (Rabin, 1993), as an important motive underlying the informal financial transactions among relatives and friends, supplements the existing knowledge in this field. Analytical results are obtained to explain the informal borrowing and lending as a mutual-max fairness equilibrium outcome. However mixed evidences are obtained for mutual-max and mutual-min reciprocity. In totality Rabin's model of fairness and reciprocity when applied to explain the informal lending and borrowing is not adequate but this seems to be an excellent starting place to incorporate social preferences for explaining the informal lending and borrowing among relatives and friends.

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