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Why Do Formal Credit, Informal Credit, and both Types of Credits Coexist as Consumer Choices?

Author

Listed:
  • Jorge Luis Garcia

    (The University of Chicago, Department of Economics)

  • Sonia Digiannatale

    (CIDE, MEXICO)

  • Victor G Carreon

    (CIDE, MEXICO)

Abstract

We analyze why formal credit, informal credit, and both types of credits coexist as consumer choices. We construct a model in which the households pay a fixed cost to access each type of market and face a market particular interest rate. The model induces a cost curve that defines an optimal, systematic sorting into credit types. The cost curve establishes that it is optimal to have informal credit when credits are small and formal credit when credits are relatively large. When using an intermediate amount of credit, the household finds it optimal to have both types of credits. After presenting the model, we use data from a pseudo-experimental, exogenous price variation spanned by a governmental intervention in Mexico to test the parametrization of the model and quantify comparative statics exercises arising from it.

Suggested Citation

  • Jorge Luis Garcia & Sonia Digiannatale & Victor G Carreon, 2015. "Why Do Formal Credit, Informal Credit, and both Types of Credits Coexist as Consumer Choices?," Economics Bulletin, AccessEcon, vol. 35(1), pages 89-96.
    • Handle: RePEc:ebl:ecbull:eb-15-00019
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    References listed on IDEAS

    as
    1. Wooldridge, Jeffrey M., 2007. "Inverse probability weighted estimation for general missing data problems," Journal of Econometrics, Elsevier, vol. 141(2), pages 1281-1301, December.
    2. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    3. Heckman, James J, 1990. "Varieties of Selection Bias," American Economic Review, American Economic Association, vol. 80(2), pages 313-318, May.
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    Cited by:

    1. Peng, Y. & Turvey, C. & Kong, R., 2018. "An Analysis of China s Reforms on Mortgaging and Transacting Rural Land Use Rights and Entrepreneurial Activity," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277308, International Association of Agricultural Economists.

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    More about this item

    Keywords

    formal credit market; informal credit market; optimal cost curve; credit market sorting.;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G2 - Financial Economics - - Financial Institutions and Services

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