ECON 6280 Study Guide - Final Guide: Microfinance, Adverse Selection, Moral Hazard
Document Summary
Formal credit (most poor do not have access to it) systemized credit system -> credit rationing. Informal credit (e. g. village moneylenders, roscas) -> lending rates are much higher (~40%- Adverse selection when banks and borrowers have asymmetric info, the bad /risky borrowers are more likely to be selected and get a loan. Moral hazard poor borrowers will have a tendency to take risks because the costs that could incur (default) is felt by the bank. Credit constraint effect when cost of funds (e. g. screening, monitoring costs) increase, interest rate goes up: multiplier effect: high monitoring cost -> high interest rate -> high reasons to default on payment -> high monitoring cost. Ex-post lock in once one lender has paid the fixed fee of getting to know you, it is costlier to switch -> moneylenders charge as if they were monopolies. High interest rate + but cheaper than informal credit. Pressure to repay (harder to invest long term)
