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Tenency, Credit Markets, Segmentation, and Hierarchical Loan Contracts

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  • Ghazala Mansuri

Abstract

The paper studies the competitive strategies of two informal lenders, traders and landlords, in the provision of credit to tenants. Each lender has a distinct market or enforcement advantage. It is shown that when lenders compete 'directly', i.e. in contracts, the landlord has the 'interlocker's edge' but the trader will lend to tenants. If 'indirect' strategies are allowed, however, a more segmented market emerges. Traders lend to the tenants of 'small' landlords, while 'larger' landlords borrow from traders and on-lend to their own tenants. It is shown that such hierarchically linked contracts can reduce tenant welfare. Further, the terms of the tenancy contract vary systematically with the tenant's loan source. The model's predictions are tested empirically.

Suggested Citation

  • Ghazala Mansuri, 1996. "Tenency, Credit Markets, Segmentation, and Hierarchical Loan Contracts," Boston University - Institute for Economic Development 72, Boston University, Institute for Economic Development.
    • Handle: RePEc:fth:bosecd:72
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