The economics of informal financial arrangements

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The goal of this paper is to explain the economics of informal financial arrangements, the reasons for their failure and success, and to prove that some forms of collective action and interlinked transactions can form a satisfactory market solution in the asymmetric information environment of developing economies. Inspired by the New Institutional Economics literature, the focus here is upon the Transaction and Information Cost Approaches, and on the Theory of Collective Action and Collective Bargains. Incorporating the work of Dale Adams, the conclusion is reached that the best way to analyze informal finance is to analyze the structure and nature of contracts within it. Following this proposition, the nature of the credit contract will be discussed in detail. Game-theoretical solutions are the main theoretical background for the cor-responding institutional solutions, particularly in a world with asymmetric in-formation and, consequently, adapted forms of contracting. The main propositions are that collective action and interlinked transactions can be the dominant bylaws of a contract that can transform a set of uncertain games into a secured supergame and institution.