Sequencing of land and credit market reforms in developing countries : a theoretical perspective

First, the authors show that prior to the establishment of an integrated national credit market, the ability of the social group to exercise some control over land transfers can be efficiency-enhancing through its effect on the performance of segmented informal finance markets. Second, they show that financial or physical collateral in credit markets is not limited to land or other pre-existing endowments. They analyze a novel mechanism that creates a bootstrap form of collateral that can substitute for mortgageable land as collateral. The mechanism entails a tax on labor output that finances a transfer to each individual equal to the average tax payment made. Individuals can pledge the transfer payments as collateral in the formal credit market. The authors show that this bootstrap collateral has the potential to make every individual better off. (Author abstract)