Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171707
Authors: 
Riekhof, Marie-Catherine
Year of Publication: 
2016
Series/Report no.: 
Economics Working Paper Series 16/264
Abstract: 
Interest payments based on income flows are a common feature of informal loans. Such so-called `interlinked loans' can be seen as an insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that on average, lenders receive 25% of the income, which corresponds to an average interest rate of 49% p.a.. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.
Subjects: 
Interlinked loan
Insurance premium
Interest rate
Small-scale fishery
Informal insurance
Informal credit markets
Interlinked contracts
Risk-sharing
India
JEL: 
O16
O17
Q22
H23
Q54
O31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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