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Moneylenders are a defining feature of credit markets in developing countries. Describe the process by which credit islands develop, in which borrowers continue to borrow
Moneylenders are a defining feature of credit markets in developing countries. Describe the process by which "credit islands" develop, in which borrowers continue to borrow from a single moneylender. Suppose that p is the probability of lending to a repaying borrower, and (1 - p) is the probability of lending to a non-repaying borrower. Assuming a zero cost of capital to the moneylender, why must the equilibrium interest rate in a repeated transaction between borrower and moneylender fall between zero and (1 - p)/p?
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