peer group formation in an adverse selection model this paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification or auditing by banks is costly peer group formation reduces interest rates due to a collateral effect namely cross subsidisation amongst borrowers acts as collateral behind a loan by uncovering such a collateral effect this paper shows that peer group systems can be viewed as an effective risk pooling mechanism and thus enhance efficiency notjust in the full information set up a well known family of adverse selection models in the stiglitz and weiss 1981 tradition demonstrates that when banks are imperfectly informed about the riskiness of borrowers projects and therefore cannot discriminate against risky borrowers interest rates become inefficiently high and worthy borrowers are driven out of the credit market the extent of this problem is substantially magnified when borrowers do not have adequate collateral to secure a loan typically adverse selection combined with lack of collateral leads to prohibitively high interest rates poorly endowed individuals e g students immigrants the unemployed and a vast majority of poor individuals in developing countries often face such high rates and therefore cannot take advantage of profitable investment opportunities a peer group formation system represents a possible solution to the above problem under this system a bank lends to borrowers without collateral on condition that the borrowers organise themselves into groups and that participant borrowers within each group accept to take joint responsibility for a loan thus in addition to repaying their own share of the loan each group member must accept to repay the obligations of their defaulting peers otherwise the entire group is denied access to future refinancing systems of this kind have been very successful in practice they have generated lower interest rates for the rural poor in for example bangladesh the philippines bolivia and the state of arkansas in the united states moreover group lending has also been successfully implemented in large urban areas such in the cities of dhaka and chicago 1

black markets for currency hoarding activity and policy reforms abstract in emerging market economies under development of financial markets leads to goods hoarding and foreign currency accumulation as forms of investment in this paper an asset market model supplemented by explicit treatment of smuggling and second economy activity is used to study the paths of black market exchange rates second economy prices hoarding stocks and privately held dollar balances following policy reforms we discuss conditions for overshooting and related dynamics of exchange rates and prices following official exchange rate adjustments price reforms and altered risks of monetary confiscation or currency reforms the saddlepath trajectory of financial adjustment is simulated using data from recent russian experience 1997 elsevier science b v

a search theoretic model of legal and illegal currency abstract using a search theoretic model of money we explore the conditions under which two currencies domestic and foreign will co exist despite legal restrictions on the use of foreign currency for internal trade we study how changes in government policy i e its enforcement of currency laws through fines or the rate of enforcement affects the acceptability of illegal currency the equilibrium value of both currencies and the implicit exchange rate first we construct a model with indivisible goods to show conditions under which legal currency is fully acceptable but illegal currency circulates with varying acceptability we then introduce bargaining to determine prices in legal and illegal currency we show that some enforcement polices can create multiple equilibria while others will not also some methods of enforcement are capable of driving the illegal currency out of circulation while others are not

group lending repayment incentives and social collateral abstract in this paper we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment this type of scheme especially in the guise of the grameen bank in bangladesh has received increasing attention we set up and analyze the repayment game which group lending gives rise to our analysis suggests that such schemes have both positive and negative effects on repayment rates the positive effect is that successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient return to make repayment worthwhile the negative effect arises when the whole group defaults even when some members would have repaid under individual lending we also show how group lending may harness social collateral which serves to mitigate its negative effect

law enforcement and the black market exchange rate abstract this paper examines how a system of multiple exchange rates can give rise to unreported exports and imports and a black market for foreign exchange risk aversion rather than an assumed smuggling or detection technology generally guarantees the coexistence of legal and illegal trading evidence for brazil suggests that enforcement of the exchange rate and trade regime is an important fundamental of the black market exchange rate that has so far invariably been left out of empirical work

commercial policy and the brain drain it is hypothesized that commercial and payments policies enacted by governments tend to raise the incomes of higher income individuals and thus to lower rates of emigration the degree of a country s intervention in its international finance and trade sectors is proxied by the black market premium for us dollars in the country it is argued that more extensive protection of domestic industry reflected in higher black market us dollar premiums raises highly skilled workers incomes reflected by a reduction in emigration using data on immigration to the usa by country it is found that higher black market premiums are related to lower us immigration rates consistent with the hypothesis

alleviating transitory food crises in sub saharan africa international altruism and trade the donor community has responded to unexpected or transitory drops in domestic food production in many countries in sub sabaran africa an empirical framework estimates and analyzes the correlation between this food aid and domestic production both emergency food aid and commercial imports are used to offset the effects of negative output shocks in sub saharan african countries the major recipients of global emergency food aid on average every one ton drop in cereal production is offset by the delivery of 0 8 tons of cereal and dairy products from abroad over four years most food aid arrives within a year of a shock and correlation of shocks over time along with the differences between crop years and calendar years may explain the link between aid and production the economic and political considerations also determine the global response to the emergency food needs of countries in africa the international response is not contingent on the form of government or the level of political and human rights violations poorer countries and those with well established nonemergency food aid programs receive larger amounts of emergency aid when needed food aid has long helped low income countries to sustain domestic food supplies and cope with transitory food insecurity and it has also been used to accelerate agricultural development and increase food production but food aid has been heavily criticized in the past decade on several grounds first it has been charged that the international response to food crises is slow meager and inefficient a related accusation suggests that countries granting emergency food aid disciriminate on the basis of the political and economic orientation of the recipient country second food aid has been thought to discourage domestic food production thus leading to long term dependence on donors finally it has

smuggling and price disparity abstract this paper proposes a model of smuggling consistent with the coexistence of smuggling legal trade and price disparity defined as a domestic price which exceeds is less than the return from legal export import these phenomena have been found to characterize indonesian smuggling a framework is presented in which legal trade is used to cloak smuggling activity with the implication that the greater the volume of legal trade the less the costs of smuggling this model is then used to explain the observation noted above and to show that smuggling may be welfare increasing vis a vis the non smuggling situation and that even if the suppression of smuggling is costless tax revenue maximization may require a positive level of smuggling in addition the model is applied to coffee and rubber exports from indonesia

smuggling camouflaging and market structure we examine how market structure and enforcement affect smuggling and welfare in a model where smuggling is camouflaged by legal sales conditions are given for when some but not necessarily all firms smuggle with camouflaging the market price is below the price when all sales are legal so smuggling improves welfare if the price effect outweighs excess smuggling cost this welfare effect is directly related to the degree of competition increased enforcement in this model potentially reduces welfare the model is shown to be consistent with evidence on cigarette smuggling in the united states for 1975 1982

the role of subsidies in microfinance evidence from the grameen bank the grameen bank of bangladesh has been in the vanguard of the microfinance movement showing the potential to alleviate poverty by providing credit to poor house holds part of this success has been built on subsidies in 1996 for example total subsidies evaluated at the economic opportunity cost of capital amounted to about us 26 30 million the evidence helps to explain why institutions like grameen have not just sprung up on their own as private commercial ventures and it underscores the value of openly addressing the costs and benefits of subsidization the paper also describes recent difficulties in maintaining high repayment rates q 1999 elsevier science b v all rights reserved

exchange rate behavior with currency inconvertibility abstract the paper analyzes exchange rate dynamics in a world where the domestic currency is inconvertible into foreign currency and there is a black market for foreign exchange the official exchnage rate is thus set by policy but the black market rate is determined by portfolio balance the stock of domestic money changes with the reported current account and the stock of foreign assets of the private sector changes with smuggling and other unreported current account transactions the effects of capital and current account disturbances as well as the effects of changes in the level and the rate of crawl of the official rate on the black market premium and on the currency substitution ratio are analyzed in variants of the basic model

smuggling illegal versus legal goods across the u s mexico border a structural equations model approach author affiliation andreas buehn faculty of business and economics technische universitaet dresden chair for economics esp monetary economics 01062 dresden germany e mail andreas buehn tu dresden de corresponding author stefan eichler faculty of business and economics technische universitaet dresden chair for economics esp monetary economics 01062 dresden germany e mail stefan eichler tu dresden de acknowledgment we thank gordon hanson for providing the data on mexican wages and u s border enforcement we are also grateful to alexander karmann sunshine moore the editor and two anonymous referees for their many useful comments and suggestions on this article we also benefited from comments of participants of the lunchtime seminar at technische universitaet dresden all remaining errors are the authors responsibility 1 introductionin this article we study smuggling across the u s mexico border from 1975 to 2004 we contribute to the literature in the following ways first we treat smuggling as an unobservable variable using a multiple indicators multiple causes mimic model we capture the latent nature of smuggling and identify its determinants and long run trends 1 secondly we argue that the analysis of smuggling has been incomplete so far existing studies merely analyze the causes of trade misinvoicing illegal trade or smuggling of legal goods which represent only a fraction of total illegal trade to improve the understanding of illegal trade we distinguish between smuggling illegal goods versus smuggling legal goods the types of smuggling differ with respect to the goods being smuggled the agents involved in smuggling the smuggling incentive and the intensity of law enforcement trade misinvoicing occurs when entrepreneurs misreport the value of legal exports or imports to evade tariffs and taxes and is commonly considered a peccadillo smugglers usually bribe officials or are fined a fee smuggling illegal freight such as illicit drugs and illegal immigrants however often involves dangerous criminals who commit serious offenses and who if caught face severe punishment as a result their incentive to smuggle is related to the intensity of law enforcement rather than tax or tariff evasion studying the u s mexican case is appropriate as most illegal drugs and immigrants enter the united states via the mexican border the large income disparity between the two nations may explain the high u s demand for illegal goods which relatively poor mexicans are willing to meet despite the risks involved we examine whether the clinton and bush administrations succeeded in reducing smuggling across the border through intensified border enforcement using a simple microeconomic framework we determine which microeconomic incentives affect the two types of smuggling the hypotheses are then tested in a mimic model that studies the impact of observed causes the microeconomic incentives to smuggle on the latent phenomenon smuggling as indicated by observable macroeconomic variables applying the benchmarking procedure promoted by dell anno and schneider 2006 and dell anno 2007 we calculate a time series for each type of smuggling we find that smuggling in illegal goods from mexico to the united states decreases when mexican labor market conditions improve and u s border enforcement is intensified the mexican recessions in 1982 1983 and 1995 led to large temporary increases in smuggling to 113 billion and 87 billion respectively smuggling in illegal goods decreased overall however from 116 billion in 1984 to 27 billion in 2004 this reduction can be attributed to stricter u s border enforcement and better mexican job prospects smuggling legal goods is driven by real exchange rates and tariff and tax evasion export misinvoicing fluctuated between underinvoicing values of 0

trade misinvoicing the dark side of world trade n this paper we study the determinants of trade misinvoicing we contrib ute to the literature in the following ways rst we present a simple micro economic framework that simultaneously analyses the effect of microeconomicincentives and deterrents on the macroeconomic phenomenon of trade misin voicing this approach takes into account that the nancial incentives for trademisinvoicing determine the decision as to whether and how much exports imports to underinvoice or overinvoice whereas the deterrents to trademisinvoicing only have an impact on the optimal amount of misinvoicing second we test the derived theoretical hypotheses using a rich data set of 86countries over the period 1980 to 2005 trade misinvoicing occurs if the true value of exports or imports deviatesfrom the amount of exports or imports businesses report to the authorities aninteresting literature has emerged that studies the determinants of trade mis invoicing by analysing bilateral trade partner statistics for recent examples fisman and wei 2007 berger and nitsch 2008 farzanegan 2008 trademisinvoicing is typically motivated by nancial incentives for example by ben e ting from a premium at the black market for foreign exchange or by evadingtariffs or taxes while the empirical literature has mainly focused on analysingthe incentives for that nancial malpractice we also test the relevance ofdeterrents to misinvoice i e the risk of detection and costs of punishment the microeconomic framework presented in this paper demonstrates that the nancial incentives for trade misinvoicing such as the black market premium

the influence of black markets on a queue rationed centrally planned economy abstract in centrally planned economies in which prices are fixed and the rationing mechanism is waiting line queues we show that an equilibrium of waiting times exists we then introduce a black market in which individuals can trade commodities that they have acquired through the official economy an equilibrium of black market prices and waiting times is shown to exist further the economy with a black market is queue efficient however the introduction of black markets is not necessarily a pareto improvement over an economy without black markets even when we allow winners to compensate losers

national trade policies and smuggling in africa the case of the gambia and senegal summary much of inter regional trade in africa is unrecorded and consists of smuggling the gambia is almost wholly enclosed within senegal yet official trade statistics show almost no trade between the two countries failing to capture large scale smuggling smuggling reflects pre colonial traditional trading relationships the artificial nature of borders created in the colonial era and the disparities in trade policies between the two countries following independence inducing large cross border price differentials for goods this paper documents the magnitude of trade protection in the two countries the resulting price differences and estimates the volume of smuggling

parallel fragmented or black defining market structure in developing economies abstract in describing market structure development economists employ such terms as fragmented informal parallel and segmented to account for the observed distributions of prices of both goods and factors although these terms are used interchangeably do they mean the same thing focusing on the parallel markets approach the paper identifies government policies which create excess demand or supply in particular markets as the core determinant of the emergence of an official unofficial market structure the legality of unofficial transactions proves critical in assessing the consequences of the parallel market situation contrasting alternative characterizations of market structure the paper concludes that the parallel market is a distinct analytical concept

price distortion and shortage deformation or what happened to the soap the model of this paper generalizes the classical theory of consumer behavior to the more general case of prices that are not necessarily market clearing suppose that in addition to the money cost some sort of search waiting or other quasi fixed effort cost is needed to obtain goods the presence of this quasi fixed cost element will trigger an inventory policy a shortage equilibrium occurs when effort costs are such that in the corresponding inventory policy the flow of desired consumption does not exceed the available supply flow stock hoarding a critical phenomenon in the economics of shortage emerges as a natural component of this model a complete characterization of a stationary shortage equilibrium is given comparative statics and welfare analysis are performed the dynamic transition between steady states is analyzed to give insight into the mechanics of how shortages develop copyright 1991 by american economic association

the effect of agriculture on repayment efficiency a look at mfi borrowing groups there is a widely held industry assumption from microfinance institutions that agricultural loans have poorer repayment rates which has resulted in many loans being provided for small businesses as opposed to agricultural purposes using data from a sample of 100 borrowing groups from a south indian microfinance institutions mfi this study challenges this belief by analyzing the repayment efficiency of borrowing groups and reflects on the implications for agricultural microfinance loans the analysis is run using bayesian stochastic frontier estimation with an exponential hierarchical prior on the efficiency term our results indicate that the average efficiency of the borrowing groups analyzed was approximately 75 and that having a higher percentage of agricultural loans increased borrowing group efficiency while gains in efficiency also rose as the size of the borrowing group increases

smuggling and the black market for foreign exchange this paper develops a model of the black market for foreign exchange in which black market currency is demanded and supplied by firms engaged in smuggling it is demonstrated that quotas or foreign exchange rationing are not necessary to induce the coexistence of legal and black foreign exchange markets variants of the model analyze the implications of capital flight unbalanced trade quotas foreign exchange licensing and economies with more than two goods

exchange rate management viewed as tax policies abstract the paper develops an analytical framework which demonstrates that along the lines of the celebrated lerner symmetry theorem the various forms of exchange rate management are equivalent to corresponding tax policies to highlight the salient issues we consider two specific categories of exchange rate policies the first is a dual exchange rate regime which separates exchange rates for commercial and for financial transactions and the second is a unified exchange rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions we show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing and unified pegged exchange rate policies can be usefully cast as lump sum tax cum subsidy policies the equivalence between the various characteristics of exchange rate management and tax management suggests that exchange rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies a two country model of the world economy is used to demonstrate the international transmission mechanism of these policies

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

can micro credit bring development abstract we examine the long run effects of micro credit on development in an occupational choice model similar to banerjee and newman jpe 1993 micro credit is modeled as a pure improvement in the credit market that opens up self employment options to some agents who otherwise could only work for wages or subsist micro credit can either raise or lower long run gdp since it can lower use of both subsistence and full scale industrial technologies it typically lowers long run inequality and poverty by making subsistence payoffs less widespread thus an equity efficiency tradeoff may be involved in the promotion of micro credit however in a worst case scenario micro credit has purely negative long run effects the key to micro credit s long run effects is found to be the graduation rate defined as the rate at which the self employed build up enough wealth to start full scale firms we distinguish between two avenues for graduation winner graduation of those who earn above average returns in self employment and saver graduation due to gradual accumulation of average returns in self employment long run development is not attainable via micro credit if winner graduation is the sole avenue for graduation in contrast if the saving rate and self employment returns of the average micro borrower are jointly high enough then micro credit can bring an economy from stagnation to full development through saver graduation thus the lasting effects of micro credit may partially depend on simultaneous facilitation of micro saving eventual graduation of the average borrower rather than indefinite retention should be the goal of micro banks if micro credit is to be a stepping stone to broad based development rather than at best an anti poverty tool

black markets for foreign exchange real exchange rates and inflation abstract the black market foreign exchange premium is a tax on exports creating a conflict between the financing of government spending and the allocative goal of stimulating exports the premium is solved for in a model that includes private portfolio choice dual exchange markets and money financing of the fiscal deficit the inflationary implications of switching to floats as a means of unifying official and black market rates are then analyzed inflation could rise substantially if the lost revenues from exports are replaced with a higher tax on money the paper is motivated with examples from sub saharan africa

intertemporal speculation shortages and the political economy of price reform price controls often focus on commodities that are storable and can thus be used in intertemporal speculation second opposition to dismantling of controls is often based on claims of low supply response and greatly bolstered if a strong supply response fails to materialise this is especially relevant in eastern europe where experience with markets is limited we show the difficulties that these two factors create for gradual decontrol of prices we endogenise the probability of a collapse of the reform programme and show that such endogeneity in the presence of intertemporal speculation leads to a strong case against gradualism the smaller the initial price increase the lower the observed supply elasticity and the greater the probability that the programme of reform will be abandoned this implies that the policy that makes most sense from a microeconomic point of view decontrol immediately is also advisable from a macroeconomic point of view credibility problems which are at the core of the transitional output losses that characterise most stabilisation programmes will be much less under a cold turkey approach and so will therefore transitional unemployment

smuggling around the world evidence from a structural equation model this article uses a multiple indicators multiple causes mimic model to analyse the determinants of smuggling the analysis reveals that higher corruption and a lower rule of law encourage smuggling tariffs and trade restrictions are important push factors while a higher black market premium bmp discourages smugglers based on the mimic estimates we calculate an index of smuggling which provides a ranking for 54 countries we find that smuggling is rampant in cameroon pakistan and kenya while it is least prevalent in switzerland finland and sweden

on the generic nonoptimality of dominant strategy allocation mechanisms a general theorem that includes pure exchange economies it is shown that if an economy s participants cannot be separated into groups across which there are no potentially conflicting interests i e if the economy is indecomposable then every continuous truth dominant allocation mechanism will attain nonoptimal allocations on an open dense set of preference profiles classical edgeworth box exchange economies economies with no externalities and no production but with arbitrary numbers of consumers and goods as well as economies with public goods and economies with other kinds of externalities are all shown via simple arguments to be indecomposable the results are extended to cover nonrevelation mechanisms copyright 1990 by the econometric society

tax evasion and the marginal cost of public funds tax evasion and deadweight loss have similar implications for the rules of public finance the optimal mix of taxes can be derived from the minimization of the sum of aggregate deadweight loss and aggregate cost of tax evasion similarly the marginal cost of public funds includes allowances for marginal deadweight loss and marginal cost of tax evasion per dollar of public revenue acquired

real exchange rate misalignment and redistribution abstract developing countries frequently maintain an overvalued nominal exchange rate resulting in real exchange rate misalignment to finance import demand at the overvalued exchange rate countries have to raise the level of income taxation or they have to resort to monetary finance this paper explains nominal and implicitly real exchange rate misalignment as the outcome of the political process more specifically the paper explains the misalignment of an import exchange rate relative to a market exchange rate used for exports voters differ in their ownership of a single factor of production real exchange rate overvaluation results if the median voter spends a relatively large share of his income on the importable good the political economy of explicit and implicit import subsidies is first analyzed in a real model which is then extended to include money holdings and exchange rate policy

foreign exchange rationing and employment in industrializing countries abstract this paper analyzes the interaction of two constraints foreign currency controls and a minimum wage on the behavior of a small industrializing country the latter is characterized by the large proportion of intermediate inputs in total imports the main results are the following 1 the two distortions magnify the adverse effects on employment of a minimum wage 2 the rationing policy is self defeating on its own terms 3 devaluation is almost inevitable despite the political considerations that make it so difficult and 4 black markets may be tolerated so openly because they help undo some of the harmful effects noted above

macro economic aspects of the effectiveness of foreign aid on the two gap model home goods disequilibrium and real exchange rate misalignment we construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage price rigidities in the classical regime but decreases them in the keynesian unemployment regime a link is made with the two gap model but we highlight the role of real exchange rate misalignment failure to clear the nt goods market

foreign exchange controls in a black market economy abstract an investigation of the impact of foreign exchange controls in a black market economy is undertaken within the context of a choice theoretic cash in advance general equilibrium model while such controls may improve a distortion free economy s trade balance and balance of payments they are found to increase the domestic price of imports and lower the country s welfare the ramifications of black market for economic welfare turn out to be ambiguous depending crucially on the government s reaction to the leakage of foreign exchange into the economy via illegal activity

on the existence of optimal truth dominant mechanisms abstract the existence of optimal dominant strategy mechanisms has been shown only for quadratic valuation functions this paper shows that non trivial pareto efficient and truth dominant mechanisms exist for a slightly larger set of valuation functions

trade regimes and wages abstract we examine the impact of restrictive trade regimes on wages in the manufacturing sector a simple three sector economic model predicts that wages will fall in response to trade regime restrictiveness empirical tests are based on data for 37 countries over time our measure of trade regime restrictiveness is the black market premium on u s dollars the results strongly suggest that restrictive trade regimes reduce wages consistent with our theoretical analysis

uniform commercial policy illegal trade and the real exchange rates a theoretical analysis countries on fixed exchange rates sometimes use uniform tariff cum subsidy utcs schemes as a way of achieving a real depreciation without disturbing the nominal exchange rate a potential drawback of this policy in relation to an across the board devaluation is that a utcs scheme provides incentives for illegal trade using an optimizing model with currency convertibility and illegal trade the author finds that welfare is lower under a utcs scheme than under a corresponding across the board devaluation and that in some cases the real exchange rate actually appreciates in response to an increase in the utcs rate

generalized groves ledyard mechanisms abstract groves and ledyard 1977 construct a mechanism for public goods procurement that can be viewed as a direct revelation groves mechanism in which agents announce a parameter of a quadratic approximation of their true preferences the mechanism s nash equilibrium outcomes are efficient the budget is balanced because groves mechanisms are balanced for the announced quadratic preferences tian 1996 subsequently discovered a richer set of budget balancing preferences we replicate the groves ledyard construction using this expanded set of preferences and uncover a new set of complex mechanisms that generalize the original groves ledyard mechanism the original mechanism however remains the most appealing in terms of both simplicity and stability

structural adjustment to a terms of trade disturbance the role of relative prices abstract this paper investigates the impact of a terms of trade disturbance on a small economy which responds gradually to changes in relative prices the key intertemporal link is as in dornbusch 1983 between the price of nontraded goods the real interest rate savings and the current account if the traded and nontraded goods are bad substitutes in consumption then an improvement in the terms of trade leads to a transitory current account surplus and conversely international capital mobility reduces the impact of a terms of trade disturbance on relative prices and also reduces the speed with which the economy adjusts to the disturbance

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

repayment frequency and default in microfinance evidence from india in stark contrast to bank debt contracts most micro finance contracts require that repayments start nearly immediately after loan disbursement and occur weekly thereafter even though economic theory suggests that a more flexible repayment schedule would benefit clients and potentially improve their repayment capacity micro finance practitioners argue that the fiscal discipline imposed by frequent repayment is critical to preventing loan default in this paper we use data from a field experiment which randomized client assignment to a weekly or monthly repayment schedule and find no significant effect of type of repayment schedule on client delinquency or default our findings suggest that among micro finance clients who are willing to borrow at either weekly or monthly repayment schedules a more flexible schedule can significantly lower transaction costs without increasing client default jel 012 016 022

the challenge of rural financial inclusion evidence from microfinance financial inclusion is said to foster development and growth however progress in financial inclusion has been slow in rural areas where poverty is most pronounced this is often attributed to hig

the black market for dollars in chile abstract this study investigates the effects of foreign exchange restrictions on the black market premium for dollars in chile over the period 1975 1984 the model emphasises the interaction of stock and flow conditions in the black market for dollars our results support the view that the real exchange rate the official depreciation adjusted interest rate differential the dollar value of peso assets valued at the official exchange rate and foreign exchange restrictions are important determinants of the black market premium

strategic trading in a two sided foreign exchange auction abstract the market microstructure chosen for foreign exchange markets can influence trading volumes and equilibrium exchange rates with emerging markets and developing countries increasingly utilizing two sided auctions we show that the choice of the discrete t tonnement auction creates incentives for strategic behavior among market participants theoretical predictions on strategic under revelation of demand or supply positions are supported empirically using detailed data from a rare example of a t tonnement market the moscow interbank currency exchange our results suggest that market microstructures should be introduced alongside more traditional asset market fundamentals in studies of foreign exchange market activity especially in developing countries

can flexible agricultural microfinance loans limit the repayment risk of low diversified farmers using a unique data set from a commercial microfinance institution in madagascar this article investigates the credit risk of microfinance loans with flexible repayment schedules for crop farmers flexible repayment schedules allow a redistribution of principal payments during periods with low agricultural returns to periods when agricultural returns are high through predefined grace periods we apply propensity score matching to investigate how different numbers of grace periods reflecting different levels of production diversification affect the credit risk of crop farmers in this attempt three delinquency categories reflecting various levels of credit risk are assessed moreover we consider the specifics of the regions where loans were disbursed our results reveal that loans with predefined grace periods show significantly higher delinquencies this effect is significant over all three delinquency categories for loans disbursed to low diversified crop farmers for the more diversified farmers this effect is only significant for the lowest delinquency category hence predefined grace periods might bridge periods with low agricultural returns but come at the cost of higher credit risk for the lender the magnitude of these effects is however small

capital mobility and devaluation in an optimizing model with rational expectations this paper examines the effects of ex change rate policies when individuals maximize lifetime utility on the basis of rational expectations about the future the economy studied is one in which the authorities allow free mobility of capital under a crawling peg exchange rate regime many industrializing economies have adopted a crawling peg as a means of reconciling disparate inflation rates at home and abroad and some recent efforts to use the rate of crawl as an instrument of anti inflation policy have attracted considerable interest see carlos diaz alejandro tools similar to those employed here have been applied by guillermo calvo forthcoming to study this type of exchange rate management under conditions of capital immobility this abstract was borrowed from another version of this item

distribution properties of latin american black market exchange rates abstract this paper conducts a statistical analysis of the distribution properties of black market exchange rate changes for 12 latin american currencies the infinite variance stable law hypothesis is tested using a regression type technique to estimate the parameters of the stable paretian distribution strong evidence is found supporting this hypothesis a separate analysis of extreme observations using a robust statistical procedure further supports these findings

the black market for dollars in brazil the model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling a partial equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official depreciation adjusted interest differential as well as seasonal factors associated with tourism expectations of future exchange rate changes under rational expectations are shown to affect the current level of the black market premium the empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern the magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios

currency inconvertibility trade taxes and smuggling abstract in the classic analysis of smuggling importers choose the optimal mix of legal and illegal trade given trade taxes and the technology of detection this paper introduces an inconvertible currency in the framework so that illegal trade is valued at a rate higher than the fixed official exchange rate sections 2 and 3 show how the smuggling ratio and the domestic price markup for the import and export good are simultaneously determined with balanced legal and illegal trade changes in the long run black market premium are a weighted average of changes in trade taxes whereas changes in the smuggling ratios depend on the ration of trade taxes thus an import tariff and an export subsidy rising at the same rate would keep smuggling ratios constant but imply a rising black market premium sections 4 and 5 to determine the quantity of exports and imports a model of the economy is presented in section 6 featuring the production of exports and non traded goods and the consumption of imports and non traded goods as well as a government confiscating the amounts of traded goods unsuccessfully smuggled then export production may fall and welfare may rise if trade taxes have a negative effect on the relative price of exports and imports stronger than the positive effect on smuggled exports and imports which is always welfare reducing section 7 introduces the short run determination of the black market premium via portfolio balance in this case rising trade taxes may be associated with a premium rising even faster if there is unreported capital flight and conversely

implementation of the lindahl correspondence by a single valued feasible and continuous mechanism this paper considers the problem of designing mechanisms whose nash allocations coincide with the lindahl allocations for public goods economies with more than one private good unlike previous mechanisms the mechanism presented here has a single valued feasible and continuous outcome function furthermore when there are no public goods in economies feasible and continuous implementation of the constrained walrasian correspondence can be obtained as a corollary of our theorem 1

colombia s black market in foreign exchange abstract decree law 444 in 1967 heavily restricted access to foreign exchange by colombian residents this policy spurred the development of a large black market which had grown to about us 2 5 billion of transaction value per year by 1988 soon after the restrictive policies were imposed marijuana and then cocaine smuggling became large industries in colombia this narcotics boom has apparently driven down the black market exchange rate and largely eliminated the exchange rate premium that is usual for such markets while colombia s government has opened up the official foreign exchange market in the early 1990s the black market is expected to continue to thrive due to the smugglers need to resort to underground means for transacting their business

risk matching behavior in microcredit group formation evidence from northern ethiopia theoretical models on group lending assume the formation of groups of homogenous risk types recent theoretical and empirical findings challenge this view arguing that when markets for insurance are missing risk homogeneity may not hold any more and risk heterogeneity can be the optimal outcome using data from an mfi in tigray ethiopia this article examines the homogeneity hypothesis and reflects on implications for repayment no evidence is found that supports risk homogeneity even accounting for matching frictions however we also do not find an explicit link between the presence of risk heterogeneity and side payments due to missing insurance as suggested in the literature instead other trust based social networks seem to underlie heterogeneity such social networks are often synchronized with credit groups and influence the probability of repayment under heterogeneity the implication is that successful repayment rates in group lending need not arise only under risk homogeneity but can also arise under risk heterogeneity heterogeneity may also serve to bridge missing insurance markets in poor rural environments mfis therefore need to consider such local conditions when designing their lending schemes

devaluation exchange controls and black markets for foreign exchange in developing countries abstract this paper analyzes the response of external balance indicators to anticipated devaluation in a model incorporating the movement of black market exchange rates under rational expectations the analysis is then extended to the case of devaluation cycles to examine the behavior of black market rates and official trade statistics in the face of persistent inflation that appreciates the real exchange rate and motivates periodic devaluation the data confirm the predicted response of the black market rate to devaluation as well as the sensitivity of official exports data to movements in the black market rate

smuggling trade and price disparity a crime theoretic approach abstract we provide a simple but fairly general model of smuggling capable of handling both the bhagwati hansen type of illegal trade through illegal entry points and the pitt type of illegal trade through legal entry points the paper focuses on the latter type of trade we take explicit account of the risk and uncertainty associated with illegal activity and moreover treat the real costs of smuggling as a choice variable of the firm it is shown that smuggling legal trade and price disparity may coexist as in pitt the economy s response to increased enforcement of laws against smuggling is explicitly analyzed it is shown that increased enforcement raises real per unit costs of smuggling and the domestic price of importables but lowers both the absolute quantity and the share of illegal imports in total imports the effect on welfare is ambiguous

microenterprise lending to female entrepreneurs sacrificing economic growth for poverty alleviation abstract this research compares the performance of female and male entrepreneurs in a microenterprise credit program in guatemala previous research and field practice has suggested that targeting credit at female borrowers allows for greater increases in household welfare but that male entrepreneurs may more aggressively expand enterprises when given access to credit in this paper we develop a model that shows that increases in value of home time during childbearing years for women may substantially account for gender differences in responses to credit access empirical results from guatemalan survey data yield estimations consistent with the predictions from our model

adjustment with a fixed exchange rate cameroon cote d ivoire and senegal as members of the cfa franc zone cameroom cote d ivoire and senegal cannot use the nominal exchange rate as a tool of macroeconomic adjustment this article considers these countries responses to the commodity and oil price shocks of the 1970s in light of this and other institutional constraints using a two sector model it shows that there exist instruments that in principle permit the real exchange rate depreciation necessary for adjusting to macroeconomic imbalances the authors interpret the very different adjustment experiences of the three countries despite their common economic structure and institutional setting in terms of different uses of these instruments alternative assumptions about the labour market leave the qualitative nature of the results unaltered statistical analysis of data from the three countries confirms the model s linking of the current account and real exchange rate with the instruments of adjustment

a novel test of the monetary approach using black market exchange rates and the johansen juselius cointegration method abstract cointegration is appropriate for testing long run exchange rate theories such as the monetary approach but the post 1973 floating exchange rate period may be too short we confirm the monetary model using longer black market exchange rate series and the johansen juselius cointegration method

jamaica s foreign exchange black market as in many other less developed nations the imposition of foreign exchange controls promoted the growth of a foreign exchange black market in jamaica this article explains the structure and functioning of the market in recent years under controls initially imposed in 1954 this market grew to about us 1 7 billion of transaction value per year by 1990 during the 1980s the main participants in the market seeking to buy foreign exchange were jamaican importers and savers who either were restricted from obtaining foreign exchange in the official market or chose to evade taxes and other rules by using the black market on the supply side were jamaican expatriates living abroad foreign tourists ganja exporters and traders using false invoices thousands of black market exchangers provided the market making service sometimes adding the service of funds transfer overseas a black market exchange rate model supported this interview based institutional description of the market the foreign exchange black

exchange rate regime reforms with black market leakages abstract many countries have multiple exchange rate regimes with black or secondary currency markets operating alongside an exchange rate pegged or determined in interbank or auction markets leakages occur across these markets necessitating careful analysis of the dynamic effects of numerous policy instruments using a model with multiple exchange rates and leakages we trace the dynamic effects on official and parallel foreign exchange markets of exchange rate unification changes in foreign exchange surrender requirements taxes on trade and capital account transactions and official exchange rate devaluation simulations based on russia s recent experience demonstrate the qualitative importance of the results

the transhipment problem smuggling and welfare in paraguay abstract this paper studies the effects of contraband on resource allocation and welfare using parguayan data a major portion of exports from this economy involves the transhipment of goods from third countries through paraguay to brazil and argentina to avoid trade taxes both explicit and implicit via quantitative restrictions and multiple exchange rates using international and paraguayan databases for 1990 we calculate that contraband accounted for 58 of exports and 31 of imports finally we estimate that such trade increased welfare by 2 1 of gdp