Informal Credit in Village Economies: Contract Duration with Personal and Community Enforcement

This paper provides an explanation for households' choices between informal loan contracts that:

• Have well-defined repayment periods;
• Are open ended.

The paper provides a description of the data analyzed for the study including:

• Time period of the survey;
• Location of the survey;
• Household demographics;
• Income sources;
• Information on credit, labor and land agreements involving villagers.

It discusses a model for analyzing the choices for accessing informal credit repayment methods and tests a number of assumptions as follows:

• The size of optimal fixed duration loans of two households residing in:
  • Different districts not exceeding the optimal open-ended loan;
  • Same districts exceeding the size of the optimal open-ended loans.
• The borrowers' social networks:
  • Not influencing the terms of the loans with lenders in different districts;
  • Influencing the terms of the loans with lenders in same district.
• Households residing in:
  • Different districts are more likely to negotiate open-ended loans when they are related or acquainted rather than when they are unacquainted with one another;
  • Same districts are no more likely to negotiate open-ended loans when they are related or acquainted than when they are unacquainted.

The paper concludes by stating that empirical work confirms:

• Fixed duration loans are smaller than open ended loans;
• The likelihood of negotiating an open ended loan increases with parties having a close social relationship;
• Households living near each other are more likely to negotiate community enforced loans.