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UBC Theses and Dissertations

Transition of credit institutions : theory and evidence Mukherjee, Anirban


Economic development is characterized by the expansion of interpersonal trade which requires the institutions for contract enforcement. In order to sustain trade at a greater scale, a society needs to develop the formal institutions that can enforce contracts between strangers. Hence, economic development can be characterized by the development of formal institutions. My PhD dissertation seeks to identify factors that cause the transition from the kinship based or informal institutions to the law based or formal institutions. In order to compare the process of transition in a now developed country with that in a developing country, one case study from early modern England and one from colonial India are considered. In the context of early modern England, my thesis identifies such a transition in the credit and the legal institutions. I find that the increase in social heterogeneity in early modern England rendered the informal institutions ineffective and induced people to move to the formal institutions for resolving disputes. Consequently, formal institutions developed following a 'learning by doing' mechanism. I develop a theoretical model that attempts to capture the historical accounts of this process, and generates some testable implications which I test using the archival data from The National Archive, England. The historical evidence is consistent with my model's predictions. The study on early modern England, in my dissertation, is complemented by a study on Nattukottai Chettiars, a major banking caste from South India. In the first quarter of the twentieth century some of the Chettiar Bankers switched from caste based banking to joint stock banking. I analyze this transition using a theoretical model, and provide historical evidence in support of my analysis. A general pattern of transition emerges from the case studies. The informal institutions have advantage in processing information flowing through the community networks. A society moves from the informal to the formal institutions when the informal institutions lose that edge. In the English case, the informal institutions lost the edge because of increasing social heterogeneity while in the Indian case the improvements in communication technology caused the transition.

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