TY - JOUR

T1 - Strategic interaction in undeveloped credit markets

AU - Andersen, Thomas Barnebeck

AU - Malchow-Møller, Nikolaj

N1 - JEL Classification: O1, D8, G2

PY - 2006

Y1 - 2006

N2 - This paper studies the strategic interaction between informal and formal lenders in undeveloped credit markets. In a model with adverse selection, loan seniority, market power, and differences in the cost of lending, it is shown that under general conditions a co-funding equilibrium will be a Nash outcome of the game. We demonstrate that a collateral requirement in connection with formal loans always generates a new co-funding equilibrium in which both lenders earn higher profits. A government subsidy to the formal lender may have the opposite effect. We relate our results to existing empirical evidence and the emerging discussion of how to best ensure financial viability and outreach of microfinance institutions

AB - This paper studies the strategic interaction between informal and formal lenders in undeveloped credit markets. In a model with adverse selection, loan seniority, market power, and differences in the cost of lending, it is shown that under general conditions a co-funding equilibrium will be a Nash outcome of the game. We demonstrate that a collateral requirement in connection with formal loans always generates a new co-funding equilibrium in which both lenders earn higher profits. A government subsidy to the formal lender may have the opposite effect. We relate our results to existing empirical evidence and the emerging discussion of how to best ensure financial viability and outreach of microfinance institutions

KW - Faculty of Social Sciences

KW - co-funding

KW - screening

KW - informal credit

U2 - 10.1016/j.jdeveco.2005.03.001

DO - 10.1016/j.jdeveco.2005.03.001

M3 - Journal article

VL - 80

SP - 275

EP - 298

JO - Journal of Development Economics

JF - Journal of Development Economics

SN - 0304-3878

IS - 2

ER -