Working Paper: CEPR ID: DP12863
Authors: Franklin Allen; Meijun Qian; Jing Xie
Abstract: This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.
Keywords: informal financing; asymmetric information; social collateral; firm growth
JEL Codes: G21; G30; O16; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| constructive informal financing (O16) | firm growth (L26) |
| constructive informal financing (O16) | sales growth (O49) |
| informal financing (constructive) (G32) | mitigate adverse selection and moral hazard (D82) |
| underground financing (G21) | firm growth (L26) |
| informal financing is complementary to formal financing (G29) | firm growth (L26) |
| size of firm (L25) | effectiveness of informal financing (G21) |