Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis

Chaudhuri, Sarbajit and Dwibedi, Jayanta (2014): Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis.

Abstract

The paper shows that the policy of forging a vertical linkage between the formal and informal credit markets is distinctly superior to the existing credit policy of horizontally substituting the informal sector by the formal one. An inflow of subsidized formal credit to the informal lenders not only ensures better terms of borrowing to the small borrowers but also leads to higher agricultural productivity vis-à-vis the horizontal linkage case. Even if the informal sector lenders are allowed to collude, the informal interest rate is still lower in the vertical linkage case.

• Item Type: MPRA Paper
• Language: English
• Keywords: Formal credit, informal credit, horizontal linkage, vertical linkage, moneylender, collusion.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D89 - Other; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q14 - Agricultural Finance

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