Informal and Formal Credit Markets and Credit Rationing in Côte D'Ivoire

Abstract

This paper endeavours to shed light on the respective roles of the formal and the informal credit markets in developing countries. We use survey data for manufacturing firms in Côte d'Ivoire, documenting their access to informal credit markets, their investments, and their financing. We confront these data with a simple moral-hazard model of credit rationing. Because of socio-cultural effects, the magnitude of moral-hazard problems and the cost of credit can be different in the informal credit market. We offer a structural econometric estimation of this model. Our empirical results point at severe moral-hazard problems for all firms, and reduced cost of credit in the informal market. Our point estimate suggests that moral-hazard problems can be alleviated in the informal credit market. Policy implications of our results are sketched. Copyright 2001, Oxford University Press.