Justification of the Coexistence of Formal and Informal Reciprocal Loans in Developing Countries
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Date
2017-10
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Scientific Research
Abstract
This paper provides a new justification for the coexistence of formal and informal
reciprocal loans in developing countries. We develop an investment
model capable of comparing the financing costs of different financing alternatives.
Notably, the reciprocal feature of interest-free loans from friends imposes
an agnostic obligation on the borrower and generates implicit financing
costs. The diverse financing outcomes hinge on the comparison of the explicit
costs of formal loans and the implicit costs of reciprocal loans from friends.
Description
Keywords
Coexistence, Reciprocal Loan, Financing Costs, China
Citation
Theoretical Economics Letters, 2017, 7, 1865-1872