TITLE:
Justification of the Coexistence of Formal and Informal Reciprocal Loans in Developing Countries
AUTHORS:
Jianmei Zhao, Ruihan Liu
KEYWORDS:
Coexistence, Reciprocal Loan, Financing Costs, China
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.6,
October
31,
2017
ABSTRACT: This paper provides a new justification for the
coexistence of formal and informal reciprocal loans in developing countries. We
develop an investment model capable of comparing the financing costs of
different financing alternatives. Notably, the reciprocal feature of
interest-free loans from friends imposes an agnostic obligation on the borrower
and generates implicit financing costs. The diverse financing outcomes hinge on
the comparison of the explicit costs of formal loans and the implicit costs of
reciprocal loans from friends.