Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market

Abstract

In many areas of the world, a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision. We present models of markets with endogenous enforcement costs, motivated by studies of rural credit markets. We show that subsidies may have perverse effects under monopolistic competition, increasing prices or inducing exit. Higher prices (interest rates) result from the loss of scale economies or from negative externalities among suppliers. The models are consistent with the puzzling evidence that infusions of government-subsidized formal credit have not improved the terms offered by moneylenders.

Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment

“…Brazil 36 Entry of a bank offering subsidized loans may also have exerted downward pressure on interest rates charged by moneylenders. The net direction of this effect is ex ante unclear (see Hoff and Stiglitz (1998)) and the lack of comparable and consistent data on moneylender interest rates prevents us from testing directly for this effect in our data. 37 The story for credit flows is similar.…”

“…In column (4) we find no evidence that rural branch expansion affected urban poverty. This increases our 31 The OLS regression is of the form yit = αi + β t + λB R it + εit, where yit is the outcome of interest and B R it is the cumulative number of branches opened in rural unbanked locations per capita. 32 The coefficient on initial financial development time trend interaction term shows that rural poverty was throughout lower in more financially developed states.…”

“…Political imperatives also implied that widespread loan default on the part of borrowers was permitted, and made the banking sector more susceptible to elite capture (La Porta, Lopez-De-Silanes and Shleifer, 2003; Sapienza, 2003). Some go as far as to claim that elite capture, combined with the imposition of interest rate ceilings in the formal sector, led to financial dualism wherein formal subsidized funds are concentrated in the hands of the powerful few and terms in the informal markets (on which the poor depend) worsened (see Adams et al 1984;Braverman and Guasch 1986;Hoff and Stiglitz, 1998). In sum, it is believed that formal subsidized credit was ineffective in reaching the poor, and may even have undermined rural development and increased rural poverty.…”

Access to capital in rural Thailand: An estimated model of formal vs. informal credit

“…The first assumes that only informal lenders have access to institutional credit who then re-lend to poorer borrowers. The work by Hoff and Stiglitz (1997), Bose (1998) and Floro and Ray (1996) follow this approach. 6 The second, more in line with our paper, considers formal institutions competing directly with informal lenders.…”

Dualisme financier et politique monétaire : un réexamen théorique des implications

“…Dans le cadre des relations horizontales analysées par Bell (1990) et Kochar (1992) notamment, les demandes et les excès de demande sont adressés respectivement à la banque et aux IMF. Par ailleurs, la complémentarité de type vertical suppose que les IMF bénéficient de financement bancaire qu'elles recyclent en crédit (Hoff et Stiglitz, 1998). Le processus d'articulation financière entre les deux sous-secteurs du système financier par le jeu de ces différentes complémen-tarités a fait l'objet d'études analytiques et descriptives pour la plupart (Essombe, 1998;Lelart, 2000;Nsabimana, 2004).…”