MONEYLENDERS AND BANKERS - PRICE-INCREASING SUBSIDES IN A MONOPOLISTICALLY COMPETITIVE MARKET (VOL 52, PG 429, 1997)

In many areas of the world, a significant part of the cost of obtainin g a good or service is the cost of enforcing the contracts entailed in its provision. Pie present models of markets with endogenous enforcem ent costs, motivated by studies of rural credit markets. We show that subsidies may have perverse effects under monopolistic competition, in creasing prices or inducing exit. Higher prices (interest rates) resul t from the loss of scale economies or from negative externalities amon g suppliers. The models are consistent with the puzzling evidence that infusions of government-subsidized formal credit have not improved th e terms offered by moneylenders. (C) 1998 Elsevier Science B.V.