Can modern credit markets crowd out informal insurance? Using data from an Indian village in transition, we find that "traditional" households exchange more in-kind transfers, while "modern" households rely more on formal markets.

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Abstract

Contractual interlinkages in rural developing communities may provide informal insurance when information is incomplete, potentially shaping resource distribution. The introduction of modern credit markets might undermine these informal arrangements, reducing their effectiveness as insurance. Using data from a transitional Indian village comparing households operating under “modern” and “traditional” regimes, we find that traditional households receive more frequent in-kind food and clothing transfers while making more frequent in-kind crop output payments to others.

BibTeX

@Article{	  ligon05,
  author	= {Ethan Ligon},
  title		= {Formal Markets and Informal Insurance},
  journal	= {International Review of Law and Economics},
  year		= 2005,
  volume	= 25,
  number	= 1,
  pages		= {75--88},
  doi		= {10.1016/j.irle.2004.06.005}
}