Chapter 16 Credit markets and interlinked transactions This chapter presents a discussion on credit markets and interlinked transactions. The chapter discusses a general specification of a credit contract which is then specialized to yield the three main models to have appeared in the literature. In so doing most of the important themes and ideas are introduced. The chapter discusses some of the relevant evidence that establishes the empirical importance of interlinking. Following a discussion of the reasons for interlinking the principal agent and bargaining theoretic approaches are compared and contrasted in the context of resource allocation innovation and welfare. The exposition refers to rural life and its principal actors: farmers laborers landlords tenants moneylenders and traders. Much of the analysis however can be applied readily to urban life though the balance of emphasis between the problems of hidden information and hidden actions must then be shifted in favor of the former. Two themes identified above recur throughout this chapter and exert considerable influence over its analytical approach and emphasis. First where information is concerned there is the distinction between not knowing what sort of person one is dealing with which may result in adverse selection and not knowing what actions that person will take if a contract is sealed which may result in moral hazard. Second the problems of contractual enforcement and willful or strategic default by borrowers are given a prominent place in the analysis. A third theme stems from these departures from the framework of complete and competitive marketsnamely how the scope for strategic behavior is resolved in equilibrium. The principal agent formulation appears in a number of guises throughout the chapter. Strategic default has had a prominent place in the analysis of this chapter.