The Effects of Institutional Quality on Formal and Informal Borrowing Across High-, Middle-, and Low-Income Countries

Abstract

This paper examines the effects of institutional quality on financing choice of individual using a large dataset of 137,160 people from 131 countries. We classify borrowing activities into three categories, including formal, constructive informal, and underground borrowing. Although the result shows that better institutions aids the uses of formal borrowing, the impact of institutions on constructive informal and underground borrowing among three country sub-groups differs. Higher institutional quality improves constructive informal borrowing in middle-income countries but reduces the use of underground borrowing in high- and low-income countries.

Keywords: financial inclusion, formal borrowing, informal borrowing, institutional quality

JEL Classification: G21, O17, O43