Informal credit markets, interlinkage and migration

Abstract

This paper develops a model of interlinkage in the credit market and labor market. A credit-cum-labor contract provides the necessary funds to undertake an investment in migration, given the absence of sufficient collateral. The optimal interlinked contract eliminates the scope for strategic default. The result shows that the very presence of inequality is a necessary condition for migration to take place. This could explain the apparent paradox of why poor households in villages where asset distribution is very skewed are more likely to migrate than households in poorer villages with less unequal asset distribution.