A Study On Generative Mechanism Of Informal Financial Risk

Informal finance has been stably developing for thousands of years in China,within which it is playing as the main method of financing in society.Informal finance not only fulfills consumption needs but also plays as an important support of private economy.After thousands-year stability,however,there were turbulences within the informal finance market in China,especially in some areas including south and east coastal provinces and certain cities of Inner Mongolia,where a series of informal financial crises has happened sequentially.It seems that informal finance turns from a booster of economic development to be a most instable factor in the field of private sector all of a sudden.Although policy-makers never stop searching for methods to cope with the risk of informal finance,there is nothing available yet that can be used to monitor and control its risk effectively.In the face of such a reality,this dissertation is aiming at three research questions:how has the risk mechanism of informal finance in China been changed?How has the change pushed the informal finance to be instable?And what is the role played by social network?Concentrating on these questions,this dissertation proposes a principle that theoretical research as well as policy-making should comply with the characteristics of informal finance.The risk of informal finance based on social network and personalized contract system has been controlled under a low level for a long time in China.Informal finance should not be analyzed without its foundation and carrier-social network;correspondingly,any supervision on informal financial activities should also stay with social network.This is the reason why we need to explore the relationship between informal finance and social network,from which we are supposed to know the micro mechanisms of risk formation and contagion.Nevertheless,current research of informal finance stagnated at the surface description and lacked deeper analysis that can get the micro structure and logic of informal financial activities due to their elusiveness.To conquer this problem,this dissertation combines methods of economics and sociology to fit social network into the economic research framework.Besides the economic assumptions that individuals are self-interest and economically rational,this dissertation absorbs sociability as a new dimension into its basic outlines so as to expand the research scope of economics and finance.In short,this dissertation depicts and tests the risk generative mechanisms of informal finance from a social network perspective.This dissertation has three research goals:1)It aims to outline the trajectory of informal financial activity in China historically,based on which the key variable influencing informal financial risk can be obtained.Realization of this goal constructs foundation for further research on risk mechanisms.2)This dissertation aims to depict the risk generative mechanisms of informal finance based on the role played by social network.This goal can be decomposed into the risk mechanisms of simple contract based on single social relationship and complex contract based on social network.And 3)This dissertation aims to test the theoretical model proposed above by empirical study of informal financial risk mechanisms.Based on the new social-network-oriented definition and categorization of informal finance,this dissertation gets several conclusions:1)the historical trajectory of informal finance is outlined to be a fulfillment of consumption needs transiting to a fulfillment of investment or even speculation needs,along with which the risk is sharply increasing because of the drop of both information asymmetries and default costs.This transition is unfolded by the change of social network structure and is the key factor of contract risk.2)Social network ensures the simple contract to be made and exercised at low interest rate in long run.On the contrary,the interest rate of informal financial contracts that surpass social network trends to be extremely high so as to fail the contract.3)A social network with tight structure,including no strange member or low looseness,ensures the performance of complex contracts;whereas a social network connected by multi-activity players has distinct effects on risk depending on the structural position of that player-the risk of an informal financial activity can be inhibited if its organizer simultaneously organizes or participate in other activities;or the risk is increased if its participant simultaneously participate in other informal financial activities.There are three kind of causes that can explain the difference for the last phenomenon:first of all,members of one social network are monitored by other members in other social networks connected by multi-activity players,which can be called synergistic monitoring effect;second,members of one social network are punished by other members in other networks connected by multi-activity players,which can be called synergistic punishment effect,correspondingly;last,financial resource is diluted by multi-activity players in each activity that they attend.The former two effects reduce risk;whereas the last one increases risk of failure.The innovations of this dissertation include:1)it proposes a new definition of informal finance according to its own characteristics;2)this dissertation outlines the historical trajectory of informal finance in China based on the comparison and generalization of available cases;3)this dissertation creatively combines research frameworks of economics and sociology and systematically analyzes risk mechanisms of informal finance;4)this dissertation captures structural information from documentation of informal financial activities,based on which it deeply explore the relationship between social network and informal financial risk mechanisms.In all,the conclusions of this dissertation fill in gap of theoretical research on informal finance and its social network structure.Complying with its own logic and rules,this dissertation explores informal financial risk mechanisms from its foundation and proposes policy suggestions based on the theoretical conclusions.Only by this means,the risk of informal finance can be controlled without losing its own effectiveness of financing and function to support economic development.This is the significance of this dissertation.The methodologies employed in this dissertation includes comparative historical analysis methods,social network analysis methods,incomplete information dynamic game theory,economic analysis methods,Newey-West robust regression method and Cox survival analysis methods,etc..Theories involved in this dissertation include information economics,financial economics,and contract theory.The dissertation is organized following the order from factual analysis to theoretical studies,from theoretical modeling to empirical tests.