Theoretical perspectives on social relationships in informal financing

Informal financing is commonly based on social relationships. We organize the theory of informal financing into three approaches that conceptualize those relationships as (1) local information; (2) social collateral; and (3) social preferences, respectively. All three are consistent with broadly observed patterns of informal financing. The social preference approach can further explain certain distinctive aspects of financing from close family and friends. The various approaches reflect variety in informal finance, or better, the social mechanisms that enable it. We advocate for reframing the research agenda to move away from the dichotomy of informal versus formal finance and focus instead on how institutions in well-developed economies combine formal and informal mechanisms to unlock financing.