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Informal, formal institutions and credit: complements or substitutes?

Published online by Cambridge University Press:  18 February 2019

Paula Cruz-García  and
Jesús Peiró-Palomino
Paula Cruz-García*
Affiliation:
Department of Economic Analysis, University of Valencia, Avda. dels Tarongers, s/n, 46020 Valencia, Spain
Jesús Peiró-Palomino
Affiliation:
Department of Economics and INTECO, University Jaume I, Campus del Riu Sec, 12071 Castelló de la Plana, Spain
*
*Corresponding author. Email: [email protected]
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Abstract

This paper analyses the relationship between informal institutions measured by social trust and the provision of private credit. Research on the trust–finance relationship abounds, although most of it is confined to the micro-level, with far fewer contributions from a wide, cross-country perspective. Considering a sample of 119 economies in the period 1993–2015, results suggest that social trust is an important determinant of private credit, and that its effects are transmitted indirectly via some particular aspects of the quality of economic-judicial institutions. In addition, and contrary to previous findings in related areas, substitutive effects for informal and formal institutions are not found. Therefore, informal institutions can improve the quality of the certain types of formal institutions but they are, per se, unable to replace them in the provision of credit. Accordingly, a solid economic-judicial system becomes essential to guarantee credit transactions.

Keywords

Creditinstitutionssocial trusttransmission mechanisms
Type
Research Article
Information
Journal of Institutional Economics , Volume 15 , Issue 4 , August 2019 , pp. 649 - 671
Copyright
Copyright © Millennium Economics Ltd 2019 

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