Strategic Interaction in Undeveloped Credit Markets

Thomas Barnebeck Andersen*, Nikolaj Malchow-Møller

*Corresponding author for this work

    Research output: Contribution to journalJournal articleResearchpeer-review


    This paper studies the strategic interaction between informal and formal lenders in undeveloped credit markets. In a model with adverse selection, loan seniority, market power, and differences in the cost of lending, it is shown that under general conditions a co-funding equilibrium will be a Nash outcome of the game. We demonstrate that a collateral requirement in connection with formal loans always generates a new co-funding equilibrium in which both lenders earn higher profits. A government subsidy to the formal lender may have the opposite effect. We relate our results to existing empirical evidence and the emerging discussion of how to best ensure financial viability and outreach of microfinance institutions.
    Original languageEnglish
    JournalJournal of Development Economics
    Issue number2
    Pages (from-to)275-298
    Number of pages24
    Publication statusPublished - Aug 2006


    • Informal credit
    • Screening
    • Co-funding
    • Subsidies
    • Seniority

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