| This thesis consists of three essays on competition and informal credit markets.The first essay investigates, both at a theoretical and at an empirical level, the relationship between creditors' market structure and trade credit. The essay comes to two main results. First, the empirical analysis documents that monopolists are more likely to offer no credit to any of their clients than firms operating in more competitive markets. Furthermore, in the theoretical model it is demonstrated that, in some cases, trade credit diverts resources away from the monopolists' core business, inducing them to shut credit and accept only up-front cash payment. Conversely, it is shown that in markets with more that one supplier, all other things being equal, it is never optimal to provide no credit to clients.The second essay, written jointly with S. Jain, G. Mansuri and T. Van Bastelaer, explores the main dimensions of competition among microfinance institutions ("MFI") from the viewpoint of both the MFIs and their borrowers. This essay investigates the consequences of a change in the number of competing institutions operating in a village on the lending contracts they offer. A novel dataset from Bangladesh, collected by the authors, is used. The analysis shows that while loan duration and interest rates do not respond to a change in competition, loan size typically decreases in response to an increase in the number of competing MFIs. This result provides empirical support to the literature that predicts a negative relationship between competition and informal credit. Increasing competition weakens borrower discipline, reduces information flows and increases the level of risk to which creditors are exposed to, inducing MFIs to reduce the size of the loan they offer to clients. This effect is especially salient in a mainly uncollateralized, information-intensive activity like micro credit.The third essay evaluates the degree of credit rationing in both the formal and informal credit markets in rural Pakistan and assesses the implications of credit rationing in each of these markets, for agricultural productivity. The measures of credit rationing used indicate that much of the observed lack of participation in the formal market is due to the extensive micro and macro rationing of credit. A sizable negative impact of credit rationing on crop production is found. Interestingly, the analysis finds that borrowers who are rationed only in the formal market suffer no productivity consequences while those who are rationed in both markets have substantially lower yields. |
