Monitoring cost transaction inter linkage and the selection of optimal loan contracts: evidence from rural India by Christopher A Erickson (Working Paper, No. 1991/936)

By: Material type: TextTextPublication details: Ahmedabad Indian Institute of Management 1991 Description: 27 pSubject(s): DDC classification:
  • WP 1991 (936)
Summary: Costly monitoring is an important market imperfection in developed as well as developing economies. In developed countries monitoring costs are usually minimized through inter mediation. The inter mediation process is hampered, however, by market fragmentation typical of developing agrarian economies. Borrowers may choose to use private moneylenders rather than formal banking sector intermediaries. A theory of loan contract choice is developed which emphasizes the role of monitoring costs and transaction inter linkages. The theory is tested against survey data from rural West Bengal. The results are consistent with the main conclusions of the model.
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Working Paper Vikram Sarabhai Library WP 1991 (936) (Browse shelf(Opens below)) Available WP000936

Costly monitoring is an important market imperfection in developed as well as developing economies. In developed countries monitoring costs are usually minimized through inter mediation. The inter mediation process is hampered, however, by market fragmentation typical of developing agrarian economies. Borrowers may choose to use private moneylenders rather than formal banking sector intermediaries. A theory of loan contract choice is developed which emphasizes the role of monitoring costs and transaction inter linkages. The theory is tested against survey data from rural West Bengal. The results are consistent with the main conclusions of the model.

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