Abstract
The paper presents a theory of interest rate determination in the informal credit market in backward agriculture. The market for informal credit is created by the delay in disbursement of formal credit. The delay is controlled by the official of the formal credit agency, and he is bribed by the farmer to reduce the delay. The official and the moneylender play a non-cooperative game in choosing the bribing rate and the informal interest rate, respectively. The informal sector interest rate and the effective formal sector interest rate (incorporating the bribe) are equal in equilibrium. Agricultural price and credit subsidy policies may raise the interest rate in the informal credit market.
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