Hostname: page-component-848d4c4894-8bljj Total loading time: 0 Render date: 2024-06-30T07:25:25.407Z Has data issue: false hasContentIssue false
  • English
  • Français

The insurance premium in the interest rates of interlinked loans in a small-scale fishery

Published online by Cambridge University Press:  30 August 2018

Marie-Catherine Riekhof Open the ORCID record for Marie-Catherine Riekhof [Opens in a new window]
Marie-Catherine Riekhof*
Affiliation:
CER-ETH – Center of Economic Research at ETH Zurich, Zurich, Switzerland
*
*Corresponding author. E-mail: mcriekhof@ethz.ch
Get access Rights & Permissions [Opens in a new window]

Abstract

Interest payments based on income flows are a common feature of informal loans. Such so-called ’interlinked loans’ can be seen as insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that, on average, lenders receive 25 per cent of the income, which corresponds to an average interest rate of 49 per cent p.a. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.

Keywords

Indiainformal credit marketsinformal insuranceinterlinked contractsinterlinked loaninsurance premiuminterest raterisk-sharingsmall-scale fishery

JEL classification

Q22: Fishery • Aquaculture Q54: Climate • Natural Disasters and Their Management • Global Warming O17: Formal and Informal Sectors • Shadow Economy • Institutional Arrangements O16: Financial Markets • Saving and Capital Investment • Corporate Finance and Governance H23: Externalities • Redistributive Effects • Environmental Taxes and Subsidies O31: Innovation and Invention: Processes and Incentives
Type
Research Article
Information
Environment and Development Economics , Volume 24 , Issue 1 , February 2019 , pp. 87 - 112
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ackerberg, DA and Botticini, M (2002) Endogenous matching and the empirical determinants of contract form. Journal of Political Economy 110(3), 564–591.Google Scholar
Allen, D and Lueck, D (1999) The role of risk in contract choice. Journal of Law, Economics, and Organization 15(3), 704–736.Google Scholar
Arimoto, Y (2005) State-contingent rent reduction and tenancy contract choice. Journal of Development Economics 76(2), 355–375.Google Scholar
Banerjee, A, Duflo, E and Hornbeck, R (2014) (Measured) profit is not welfare: evidence from an experiment on bundling microcredit and insurance. Working Paper 20477, National Bureau of Economic Research.Google Scholar
Baquero, G, Hamadi, M and Heinen, A (2012) Competition, loan rates and information dispersion in microcredit markets. ESMT Research Working Paper ESMT-12-02.Google Scholar
Bardhan, PK (1980) Interlocking factor markets and agrarian development: a review of issues. Oxford Economic Papers 32(1), 82–98.Google Scholar
Basu, K (1983) The emergence of isolation and interlinkage in rural markets. Oxford Economic Papers 35(2), 262–80.Google Scholar
Basu, K (1987) Disneyland monopoly, interlinkage and usurious interest rates. Journal of Public Economics 34(1), 1–17.Google Scholar
Basu, K (1992) Limited liability and the existence of share tenancy. Journal of Development Economics 38(1), 203–220.Google Scholar
Bell, C and Srinivasan, TN (1989) Interlinked transactions in rural markets: an empirical study of Andhra Pradesh, Bihar and Punjab. Oxford Bulletin of Economics and Statistics 51(1), 73–83.Google Scholar
Bell, C, Srinivasan, TN and Udry, C (1997) Rationing, spillover, and interlinking in credit markets: the case of Rural Punjab. Oxford Economic Papers 49(4), 557–85.Google Scholar
Bell, CLG (1988) Credit markets and interlinked transactions. In Chenery, H and Srinivasan, T (eds), Handbook of Development Economics , vol. 1, Amsterdam: Elsevier, pp. 763–830.Google Scholar
Braverman, A and Stiglitz, JE (1982) Sharecropping and the interlinking of agrarian markets. American Economic Review 72(4), 695–715.Google Scholar
Brown, GK and Mergoupis, T (2011) Treatment interactions with nonexperimental data in Stata. Stata Journal 11(4), 545–555.Google Scholar
Casaburi, L and Macchiavello, R (2015) Loyalty, exit, and enforcement: evidence from a Kenya dairy cooperative. American Economic Review 105(5), 286–90.Google Scholar
Casaburi, L and Willis, J (forthcoming) Time vs. State in insurance: experimental evidence from contract farming in Kenya. American Economic Review. Available at https://www.aeaweb.org/articles?id=10.1257/aer.20171526&&from=fGoogle Scholar
Chiu, WH (2010) Skewness preference, risk taking and expected utility maximisation. Geneva Risk and Insurance Review 35(2), 108–129.Google Scholar
Crow, B and Murshid, K (1992) The finance of trade and agriculture in a backward area of Bangladesh. European Journal of Development Research 4(2), 36–60.Google Scholar
Crow, B and Murshid, K (1994) Economic returns to social power: merchants' finance and interlinkage in the grain markets of Bangladesh. World Development 22(7), 1011–1030.Google Scholar
Demirguc-Kunt, A, Klapper, L, Singer, D and van Oudheusden, P (2015) The Global Findex Database 2014: measuring financial inclusion around the world. Washington, DC: World Bank Group. Policy Research working paper, no. WPS 7255.Google Scholar
Directorate of Fisheries, Government of Odisha, India (2013) Fisheries Statistics. Available at http://www.orissafisheries.com/File/statistics_2013_june.pdf (Accessed 03 September 2013).Google Scholar
Duflo, E and Banerjee, AV (2010) Giving credit where it is due. Journal of Economic Perspectives 24(3), 61–80.Google Scholar
Ellingsen, T and Kristiansen, EG (2011) Financial contracting under imperfect enforcement. Quarterly Journal of Economics 126(1), 323–371.Google Scholar
Filmer, D and Pritchett, LH (2001) Estimating wealth effects without expenditure data or tears: an application to educational enrollments in states of India. Demography 38(1), 115–132.Google Scholar
Fukunaga, K and Huffman, WE (2009) The role of risk and transaction costs in contract design: evidence from farmland lease contracts in U.S. agriculture. American Journal of Agricultural Economics 91(1), 237–249.Google Scholar
Ghatak, S (1983) On interregional variations in rural interest rates in India. Journal of Developing Areas 18(1), 21–34.Google Scholar
Gin, X and Yang, D (2009) Insurance, credit, and technology adoption: field experimental evidence from Malawi. Journal of Development Economics 89(1), 1–11.Google Scholar
Government of Orissa, India (2011) Economic Survey 2010–2011, Orissa. Technical report, Planning and Coordination Department, Directorate of Economics and Statistics, Government of Orissa, India.Google Scholar
Guha, B and Chowdhury, PR (2013) Micro-finance competition: motivated micro-lenders, double-dipping and default. Journal of Development Economics 105, 86–102.Google Scholar
Guirkinger, C (2008) Understanding the coexistence of formal and informal credit markets in Piura, Peru. World Development 36(8), 1436–1452.Google Scholar
Hatlebakk, M (2009) Capacity-constrained collusive price discrimination in the informal rural credit markets of Nepal. Review of Development Economics 13(1), 70–86.Google Scholar
Heckman, J (1978) Dummy endogenous variables in a simultaneous equation system. Econometrica 46(4), 931–959.Google Scholar
Hoff, K and Stiglitz, J (1990) Introduction: imperfect information and rural credit markets: puzzles and policy perspectives. World Bank Economic Review 4(3), 235–250.Google Scholar
Hoff, K and Stiglitz, JE (1997) Moneylenders and bankers. Journal of Development Economics 52(2), 429–462.Google Scholar
Iqbal, F (1988) The determinants of moneylender interest rates: evidence from rural India. Journal of Development Studies 24(3), 364–378.Google Scholar
Jacoby, HG and Mansuri, G (2007) Incentives, supervision, and sharecropper productivity. Washington, DC: World Bank, Policy Research Working Paper WPS 4125.Google Scholar
Karlan, D, Osei, R, Osei-Akoto, I and Udry, C (2014) Agricultural decisions after relaxing credit and risk constraints. Quarterly Journal of Economics 129, 597–652.Google Scholar
Kasperski, S and Holland, DS (2013) Income diversification and risk for fishermen. Proceedings of the National Academy of Sciences 110(6), 2076–2081.Google Scholar
Koszegi, B (2014) Behavioral contract theory. Journal of Economic Literature 52(4), 1075–1118.Google Scholar
Laffont, J-J and Matoussi, MS (1995) Moral hazard, financial constraints and sharecropping in El Oulja. Review of Economic Studies 62(3), 381–399.Google Scholar
Liu, Y, Chen, KZ, Hill, RV and Xiao, C (2013) Borrowing from the insurer: an empirical analysis of demand and impact of insurance in China. IFPRI Discussion Paper 1306, International Food Policy Research Institute (IFPRI).Google Scholar
Macchiavello, R and Morjaria, A (2015) Competition and relational contracts: evidence from Rwanda's coffee mills. 2015 Meeting Papers 431, Society for Economic Dynamics.Google Scholar
Mallick, D (2012) Microfinance and moneylender interest rate: evidence from Bangladesh. World Development 40(6), 1181–1189.Google Scholar
Menkhoff, L, Neuberger, D and Rungruxsirivorn, O (2012) Collateral and its substitutes in emerging markets' lending. Journal of Banking & Finance 36(3), 817–834.Google Scholar
Minten, B, Vandeplas, A and Swinnen, JFM (2012) Regulations, brokers, and interlinkages: the institutional organization of wholesale markets in India. Journal of Development Studies 48(7), 864–886.Google Scholar
Mohapatra, A, Mohanty, R, Mohanty, S, Bhatta, K and Das, N (2007) Fisheries enhancement and biodiversity assessment of fish, prawn and mud crab in Chilika Lagoon through hydrological intervention. Journal of Coastal Research 15(3), 229–251.Google Scholar
Mookherjee, D and Ray, D (2002) Contractual structure and wealth accumulation. American Economic Review 92(4), 818–849.Google Scholar
Noack, F (2013) Structural Change in Resource-Abundant Economies (PhD thesis), Christian-Albrechts-Universität zu Kiel.Google Scholar
Platteau, J-P and Abraham, A (1987) An inquiry into quasi-credit contracts: the role of reciprocal credit and interlinked deals in small-scale fishing communities. Journal of Development Studies 23(4), 461–490.Google Scholar
Platteau, J-P and Nugent, J (1992) Share contracts and their rationale: lessons from marine fishing. Journal of Development Studies 28(3), 386–422.Google Scholar
Prendergast, C (2002) The tenuous trade-off between risk and incentives. Journal of Political Economy 110(5), 1071–1102.Google Scholar
Ray, D (1998) Development Economics. Princeton, NJ: Princeton University Press.Google Scholar
Riekhof, M-C (2014) Essays in Resource and Development Economics (PhD thesis). Christian-Albrechts-Universität zu Kiel.Google Scholar
Riekhof, M-C (2016) The insurance premium in the interest rates of interlinked loans in a small-scale fishery. CER ETH Working Paper 16/264.Google Scholar
Sahu, BK, Pati, P and Panigrahy, R (2014) Environmental conditions of Chilika Lake during pre and post hydrological intervention: an overview. Journal of Coastal Conservation 18(3), 285–297.Google Scholar
Shami, M (2012) The impact of connectivity on market interlinkages: evidence from rural Punjab. World Development 40(5), 999–1012.Google Scholar
Sinn, H-W (1990) Expected utility, mu-sigma preferences, and linear distribution classes: a further result. Journal of Risk and Uncertainty 3(3), 277–81.Google Scholar
Steiner, B (2011) Contracting in the wine supply chain with bilateral moral hazard, residual claimancy and multi-tasking. European Review of Agricultural Economics 39(3), 369–395.Google Scholar
Stiglitz, J and Weiss, A (1981) Credit rationing in markets with imperfect information. American Economic Review 71(3), 393–410.Google Scholar
Stiglitz, JE (1974) Incentives and risk sharing in sharecropping. Review of Economic Studies 41(2), 219–55.Google Scholar
Udry, C (1990) Credit markets in northern Nigeria: credit as insurance in a rural economy. World Bank Economic Review 4(3), 251–269.Google Scholar
Supplementary material: PDF

Riekhof supplementary material

Online Appendix

Download Riekhof supplementary material(PDF)
PDF 170.4 KB