Using Contracts to Analyze Informal Finance

Abstract

For centuries discussions about informal finance have been filled with confusion and controversy (Nelson 1949)1. Moralists condemn it, politicians attempt to control and regulate it, sociologists debate its usefulness, economists dissect it looking for imperfections -while billions of people voluntarily participate in it. Fashioning a composite picture of informal finance is similar to summing the disjointed reports of judgmental blind people who have independently felt an elephant’s appendage; the parts depicted do not add to a coherent whole. This confusion justifies looking for new ways of analyzing informal finance, ways that do not prejudge the virtue of the activities and people involved, that employ common units of analysis, and that also apply research techniques representing the manner in which people make decisions. I propose using contracts as a framework for such analysis. Because of my professional interests I stress their economic aspects.