Informal loans, liquidity constraints and local credit supply: Evidence from Italy
Abstract
Using data from the Italian Survey on Household Income and Wealth for the period 1995-2012, we study the relation between informal credit (loans from relatives and friends) and the households’ access to credit from banks. We show that the two are both substitutes and complements. We first provide new empirical evidence on the positive effect, already documented in the literature, of liquidity constraints on private transfers, but we show that the relation is stronger for informal loans than for gifts, and increased during the financial turmoil. Moreover, our results show that even households with full access to the formal credit market are more likely to be indebted with relatives or friends, when compared to those with no interest in loans. This complementarity is stronger for households who have problems in paying back their loans, suggesting the presence of a care effect from relatives and friends towards distressed families. Finally, we estimate the overall effect of an expansion of local credit supply on the diffusion of informal loans, using an IV approach. The results indicate that the effect is negative, but very small, suggesting that the substitution is
compensated by an increased demand for both sources of credit.
