Do Consumers Really Prefer Formal Credit to Informal Credit? Evidence from a Pseudo-Experimental Design in Mexico

The development of economic institutions characterizes economic growth and promotes efficiency. For example, formal credit institutions operate in the credit market in a more efficient way than informal money lenders because they are better in reducing costs associated with financial market operations. Formal credit institutions are desirable . Hence, it is important to analyze how agents choose between formal and informal credit markets. Using data from an intervention that affected the supply and the demand for formal credit in Mexico, we verify that agents transition from the informal to the formal credit markets when they are given access to the latter. In order to do so, we analyze empirical transition matrices and diff-in-diff estimators.