The Impact of Information Problems, Product Differentiation, and Price Leadership on Development Finance in South Asia

Despite evidence to the contrary from South Asia, one would expect international credit subsidies to stimulate a reduction in rural interest rates. Previous studies suggest that collusion among formal and informal lenders is responsible for preclusive interest rates and excessive economic rents. This study demonstrates that product differentiation, in conjunction with adverse selection problems and asymmetric and incomplete information, generate cost asymmetries which allow these traits to persist, even within monopolistically competitive financial markets with "horizontal" subsidies. This suggests that policies specifically designed to eliminate collusive behavior will not necessarily improve the conditions for rural credit.