[Journal:] IZA Journal of Labor & Development [ISSN:] 2193-9020 [Volume:] 4 [Year:] 2015 [Issue:] 7 [Pages:] 1-21
In this paper we theoretically and empirically examine how the interaction between the formal court system and the informal loan network affects a household's decision to start a business. We find that when the formal court system is weak, expansion of informal credit network leads to the proliferation of business. However, with a sufficiently strong court system, expansion of the credit network has a negative effect on business prospects. This result is explained by the contradictions between formal laws and norms used by informal networks.