Abstract
The paper studies the screening, monitoring and enforcement mechanism of the commission agents in rural informal credit market of Punjab. The commission agents due to imperfect information invest considerable time and efforts to screen the borrowers. However, the time invested and efforts made in screening are not the same in all the regions, and the moneylenders from a region with less number of default cases invest lesser time and make fewer efforts to screen the borrower. Though the legal system is used as an enforcement mechanism in many cases, the moneylenders do not consider it efficient. The social norms and other informal mechanisms are often used to enforce the contract, even though the effectiveness of these methods is found low in regions with large number of defaults. The farmer unions, in some cases, are reported to have obstructed the contract enforcement and also played a role in renegotiation of the contract. The study also argues that the use of informal methods of enforcement, which are instigated by inefficient legal enforcement rather than their low cost, may result in inefficiencies.
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Notes
- 1.
Basu and Bell (1991) analysed the rural credit market as a fragmented duopoly, where two lenders have some common customers. The lenders, in this case, are neither monopolist (with clearly distinct set of customers) nor oligopoly (with same set of customers); rather, the market structure will be between a monopoly and an oligopoly and called it fragmented duopoly.
- 2.
Indian law differs significantly from English law on this provision.
- 3.
However, the borrower may use the Section 63 to his benefit if the lender has high opportunity cost of non-payment in time.
- 4.
Santhakumar (2003) studies the role of civil societies in environment conservation in Kerala. The study argues that the civil society chooses to oppose the economically beneficial projects due to the failure of the legal system and state to enforce the environmental law. Though the active role, played by the civil societies, prevents degradation of environment, it also hinders the economic growth, which could have avoided if the enforcement of environmental law was efficient.
- 5.
Gurdeep Singh vs Gopal Singh, RSA No.871, High Court of Punjab and Haryana, 1 (2010) [URL: http://indiankanoon.org/doc/325494/] accessed on 20 August 2011.
- 6.
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Singh, I. (2016). Imperfect Information and Contract Enforcement in Informal Credit Market in Rural Punjab. In: Singh, L., Singh, N. (eds) Economic Transformation of a Developing Economy. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-0197-0_9
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