The effects of institutional quality on formal and informal borrowing across high-, middle-, and low-income countries

TL;DR

This study investigates how institutional quality influences individuals' borrowing choices across different income countries, revealing that better institutions promote formal borrowing but have varied effects on informal and underground borrowing depending on income level.

Contribution

It provides a comprehensive cross-country analysis of how institutional quality affects various types of borrowing, highlighting differences among high-, middle-, and low-income nations.

Findings

Better institutions increase formal borrowing across countries.

Higher institutional quality boosts constructive informal borrowing in middle-income countries.

Improved institutions reduce underground borrowing in high- 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.