Corruption in a Model of Vertical Linkage Between Formal and Informal Credit Sources and Credit Subsidy Policy

16 Pages Posted: 22 Oct 2009

See all articles by Sarbajit Chaudhuri

Sarbajit Chaudhuri

University of Calcutta

Krishnendu Ghosh Dastidar

Jawaharlal Nehru University - Centre for Economic Studies and Planning

Date Written: May 21, 2009

Abstract

The present paper develops a model of vertical linkage between the formal and informal credit markets highlighting the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate.

The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. An anticorruption measure, on the contrary, may be counterproductive and raise the interest rate in the informal credit market.

Keywords: Formal/informal credit markets, interest rates

JEL Classification: O16, O17

Suggested Citation

Chaudhuri, Sarbajit and Dastidar, Krishnendu Ghosh, Corruption in a Model of Vertical Linkage Between Formal and Informal Credit Sources and Credit Subsidy Policy (May 21, 2009). Available at SSRN: https://ssrn.com/abstract=1492318 or http://dx.doi.org/10.2139/ssrn.1492318

Sarbajit Chaudhuri (Contact Author)

University of Calcutta ( email )

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Kolkata, West Bengal 700 050
India
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HOME PAGE: http://econpapers.repec.org/RAS/pch11.htm

Krishnendu Ghosh Dastidar

Jawaharlal Nehru University - Centre for Economic Studies and Planning ( email )

School of Social Sciences
New Mehrauli Road
New Delhi 110067
India

HOME PAGE: http://www.jnu.ac.in/Faculty/krishnendu

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