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Lecture 0513 - Lecture Rural Credit Markets Theory Business...

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Lecture – Rural Credit Markets: Theory 5/13/10 Business Today: Theory of Credit Markets o “Imperfect Information and Rural Credit Markets: Puzzles and Policy Perspectives” by Hoff & Stiglitz o “How do Market Failures Justify Interventions in Rural Credit Markets?” by Besley Tuesday: Policy and Institutional Innovations in Credit Markets o “Microfinance: Where do We Stand?” by Armendariz de Aghion & Morduch (required reading, not on syllabus) Problem Set 3: Due Tuesday, May 25 in lecture o START EARLY o Hand-drawn graphs ok – 5 extra credit points if graphs are in excel Outline for Today and Thursday Today: Credit Market Theory o Asymmetric information in credit markets (may lead to:) o Adverse selection and moral hazard (may lead to:) o Potential for credit market imperfections (may lead to:) Thursday: Policy and Institutional Response o Brief history of rural credit market policy in developing countries o Micro-finance/group lending o FINISH Some Empirical Motivation From Peru (comparison of loan terms across sectors) Formal sector: regulated lending institutions o Ex: banks o Low interest rates o Size of loan is large o Requires borrowers to put up collateral Informal sector: unregulated lenders o Ex: local money lender, family members o HIGH interest rates – more than double the rate charged by formal sector Riskier borrows go to the informal sector Lenders know that and charge a higher interest rate o Size of loan is small o Does not require borrowers to post collateral Some Data From Peru (rationing mechanisms in the formal sector) Constraint?
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