Delayed Formal Credit, Bribing and the Informal Credit Market in Agriculture: A Theoretical Analysis

Posted: 27 Jan 2002

See all articles by Sarbajit Chaudhuri

Sarbajit Chaudhuri

University of Calcutta

Manash Ranjan Gupta

Indian Statistical Institute, New Delhi - Economic Research Unit; Jadavpur University

Abstract

The paper presents a theory of interest rate determination in the informal credit market in backward agriculture. The market for informal credit is created by the delay in disbursement of formal credit. The delay is controlled by the official of the formal credit agency, and he is bribed by the farmer to reduce the delay. The official and the moneylender play a non-cooperative game in choosing the bribing rate and the informal interest rate, respectively. The informal sector interest rate and the effective formal sector interest rate (incorporating the bribe) are equal in equilibrium. Agricultural price and credit subsidy policies may raise the interest rate in the informal credit market.

Keywords: Farmer, Moneylender, Formal credit, Bribery, Interest rate, Subsidy policy, Nash equilibrium

JEL Classification: Q15; D89

Suggested Citation

Chaudhuri, Sarbajit and Gupta, Manash Ranjan, Delayed Formal Credit, Bribing and the Informal Credit Market in Agriculture: A Theoretical Analysis. Available at SSRN: https://ssrn.com/abstract=296502

Sarbajit Chaudhuri (Contact Author)

University of Calcutta ( email )

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Manash Ranjan Gupta

Indian Statistical Institute, New Delhi - Economic Research Unit ( email )

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Jadavpur University ( email )

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