The Effects of Law Enforcement in the Illegal Money Lending Market

Abstract

We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the effects of alternative law enforcement strategies. We find that a large enforcement crackdown that occurred during our sample period increased the lenders’ unit cost of harassment and interest rates, while lowering volume of loans, lender profits and borrower welfare. We compare this strategy to targeting borrowers and find that targeting medium-performing borrowers is the most effective at lowering lender profits.

Keywords: Illegal Moneylending, Loan Sharks, Law Enforcement, Crime

JEL Classification: K42, G51