Asymmetric Information and Social Networks in Credit Markets: A Theoretical and Empirical Study

Abstract

The need for credit has been well documented in the literature. Unlike transactions in goods and services markets, the peculiarity and speciality of credit market is that lenders exchange money today for a promise of money in the future (Ray, 1998). The possibility of default makes lending a riskier activity (Hoff and Stiglitz,1990). Lenders accordingly employ various mechanisms to ensure repayment of loans, one of them being collateral. Poor borrowers are rationed in the formal sector due to lack of sufficient collateral and they must rely on usurious moneylenders and others to satisfy their credit demand. This paves the way for coexistence of different types of lenders catering to credit needs of different types of borrowers. Given these imperfections of an underdeveloped credit market, the present study digs deeper into different aspects of the credit market. We address four vital questions surrounding credit markets and these form the four key chapters of the PhD thesis.