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Does formal financial development crowd in informal financing? Evidence from Chinese private enterprises

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  • Hou, Liming
  • Hsueh, Shao-Chieh
  • Zhang, Shuoxun

Abstract

The relationship between formal and informal finance is uncertain. They serve as substitute for high-quality borrowers but are complement for low-quality borrowers. As formal financial institutions expand, they may concentrate on high-quality borrowers or diversify among borrowers of different qualities. Using unique survey data from Chinese private firms, we are allowed to investigate the relationship for a group of borrowers who were considered as low-quality. We find that formal financial development imposes a crowd-in effect for private firms’ informal financing, especially in East China. There is heterogeneity between East and West China. We document that the crowd-in effect is greater for private firms with bank access or of large size.

Suggested Citation

  • Hou, Liming & Hsueh, Shao-Chieh & Zhang, Shuoxun, 2020. "Does formal financial development crowd in informal financing? Evidence from Chinese private enterprises," Economic Modelling, Elsevier, vol. 90(C), pages 288-301.
    • Handle: RePEc:eee:ecmode:v:90:y:2020:i:c:p:288-301
    DOI: 10.1016/j.econmod.2020.05.015
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    More about this item

    Keywords

    Informal finance; Formal finance; Crowd out; Crowd in; Financial development;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D00 - Microeconomics - - General - - - General

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