Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria

TLDR

Credit contracts in northern Nigeria pool household risk, but repayments depend on random shocks to both borrowers and lenders. The study develops two state‑contingent loan models. One model assumes a competitive equilibrium with perfectly enforceable contracts, the other allows imperfect information and default, using data from a year‑long survey in Zaria. Estimates show that state‑contingent payments are embedded in loans, yet a fully efficient risk‑pooling equilibrium is not achieved.

Abstract

Credit contracts play a direct role in pooling risk between households in northern Nigeria. Repayments owed by borrowers depend on realizations of random shocks by both borrowers and lenders. The paper develops two models of state-contingent loans. The first is a competitive equilibrium in perfectly enforceable contracts. The second permits imperfect information and equilibrium default. Estimates of both models indicate that quantitatively important state-contingent payments are embedded in these loan transactions, but that a fully efficient risk-pooling equilibrium is not achieved. The research is based on a year-long survey in Zaria, Nigeria conducted by the author.