Income Disparity, Social Capital and Informal Interest Rate
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| Title | Income Disparity, Social Capital and Informal Interest Rate
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| Author | Xu Lihe and Yuan Yan |
| Organization | Research Institute of Economics and Management, Southwestern University of Finance and Economics |
| Email | xuleehe@gmail.com,yuanyan@swufe.edu.cn |
| Key Words | Interest Rate; Informal Finance; Income Disparity; Social Capital; Rural China |
| Abstract | nterest rate is the key in the decision-making process of farmers to obtain financing. This paper contributes to the understanding of the private lending market and provides suggestions for Chinese government to make more effective use of private capital and regulate the private financial market. By constructing a partial equilibrium model, this paper studies the determinants of interest rates in the informal financial market. We find that borrowers will pay higher interest rate if the borrowers’ incomes are lower than the lenders’. Further research shows that income gap between borrowers and lenders affect interest rate due to the differences in social capital among heterogeneous income groups. Moreover, we find that formal finance constraints, relationship between borrowers and lenders, default record and human capital are important determinants of the interest rate. |
| Serial Number | WP332 |
| Time | 2012-08-29 |
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